Market Gains But Not Without Pain: 6 Predictions On What’s In Store For CRE Next Year

It’s been a tumultuous year for the commercial real estate industry, as companies spent months waiting for the interest rate cuts that finally arrived in September, and the market faced uncertainty around an election that is now poised to spark a substantial shift in federal policy.

Not everyone was able to survive to ‘25, but for those that did, things may be starting to turn around.

Bisnow spoke to several economists and market experts to hear their predictions for 2025, and they largely see clearer skies ahead, including falling vacancy in office and multifamily and a resurgence of investment.

On the flip side, some banks could see a “reckoning” as distressed assets increasingly become a major strain on balance sheets and lenders come to terms with write-downs. And there may be pain in the retail markets if more mergers lead chains to close stores.

Here are six predictions for the commercial real estate industry in 2025:

Office Vacancy To Start Decreasing

The office market continued to be the black sheep of the commercial real estate industry this year, but its fundamentals may be on the verge of improvement.

CBRE Global Chief Economist and Global Head of Research Richard Barkham said the office market is set up for a significant shift in 2025 as the economy has fared better than most employers thought, allowing them to look over their office portfolio and increase occupancy.

The firm is expecting overall office vacancy to peak at 19% in 2025 and then start coming down, in part due to rising demand. The U.S. office market has begun to see strong positive net absorption at 2.5M SF in the second quarter and then 4.3M SF in the third quarter.

“Over the course of 2025, we will start to see that vacancy come in,” Barkham said. “We’re becoming more confident now that the economy isn't going into a recession. There’s more willingness to take on long-term leases and commitment.”

Barkham said other factors could also contribute to a drop in vacancy, including a lack of new supply coming onto the market — the construction pipeline is projected to be 17M SF in 2025, well below the 44M SF 10-year average — and a slight bump in office-to-residential conversions.

“Near the end of 2025, there’s going to be a shortage of Grade A space,” Barkham said.

Banks To See More Write-Downs, Particularly From Office Loans

While the fundamentals of the office market may begin to improve, that won’t save all of the loans that are maturing on distressed office assets.

Many lenders have continued their extend-and-pretend strategy on distressed assets in their portfolios this year, but trouble could be brewing for some players with high exposure in the office market.

While 2024 didn't see major bank failures like Silicon Valley Bank and Signature Bank in the prior year, Sage Policy Group CEO Anirban Basu said there is still more pain to come for banks that specialize in commercial real estate lending.

“I think in 2025 we are going to have banks — particularly regional banks — in the headlines who are going to have to take some significant write-downs from this loss of value in the collateral supported by commercial real estate, particularly in the office market,” Basu said.

Nearly 300 banks are vulnerable because of CRE loans and could need capital infusions to avoid failure, according to a March report.

“There will be a bit of a reckoning,” Basu said. “More banks will start to feel a sting in this loss of value in their collateral.”

The extend-and-pretend strategy has grown the wall of maturities, with over $1T in debt expiring before the end of 2025.

Morningstar Credit Vice President Sarah Helwig said she expects a rise in the special servicing and delinquency rates for CMBS loans, especially in the office sector.

“Office and retail loans make up the bulk of outstanding 2015 loans that need to be refinanced,” she wrote in an email to Bisnow. “We expect that some of these less desirable loans will have trouble refinancing and expect the delinquency rate to rise as a result."

Multifamily Vacancy To Decline

CBRE’s Barkham also said he expects the multifamily sector to see bright spots as supply-demand stabilizes in specific regions, including the Sun Belt.

“I think with a good economy and consumer spending, the markets in the Sun Belt with high vacancy will quickly fall over 2025,” Barkham said.

Barkham said his firm expects apartment vacancy rates to end 2025 at 4.9%, down from 5.3% in the third quarter of 2024. Sun Belt market vacancy stood between 6% and 8% in the third quarter, Barkham said. The country is adding more housing than it did in any period since the 1970s, with a focus in the Sun Belt and Mountain regions, according to CBRE. 

Investors and owners in the Sun Belt have faced major challenges with the amount of supply coming onto the market in 2024 creating lower rent and higher vacancy in some markets.

However, Barkham said deliveries are past their peak, and occupancy is starting to recover.

“Those are the areas that are attracting population, so I think that those areas will see vacancy go down 100 basis points at least over the course of 2025,” Barkham said.

Origin Investments co-CEO David Scherer predicts that Class-A multifamily will see positive year-over-year rent growth in 2025 and 2026.

Notable markets include Colorado Springs, Dallas, Jacksonville, Las Vegas, Orlando, Raleigh and Tampa, which Origin predicts to see rent growths ranging from 4% to 5.7%.

“We’re seeing record delivery of new product from the unprecedented new development that broke ground three plus years ago,” Scherer said in a statement. “With no new substantial wave of development coming in the near term, I see a world where rents continue escalating in the next one, two, three and maybe even four years.”

New Administration To Boost Retail M&A, Spurring More Store Closures

Basu said there will be a "crescendo of M&A" activity in 2025. With a new administration coming, the retail sector's push for big mergers and acquisitions may ramp up.

Earlier this week, the deal between Kroger and Albertsons, which would have been one of the biggest U.S. supermarket mergers in history, was called off after it had been blocked by a federal judge, leading to a pending multi-billion dollar lawsuit.

With the Trump Administration coming, Federal Trade Commission Commissioner Lina Khan will be exiting her role and be replaced by Trump appointee Andrew Ferguson. Basu said this could be the beginning of a new wave of mergers that could ultimately reduce retail occupancy.

“There’s a lot of pent-up demand for those mergers to move forward, for there to be that consolidation and actually a reduction in capacity in many cases,” Basu said. “I think you’re going to see a lot of store closures ahead.”

Newmark Head of Retail Research Brandon Isner expects store closures could impact vacancy, but not substantially, as new supply has remained limited. 

"Retail availability will remain low overall, though we may see a slight increase as some retailers close underperforming stores," Isner said in a statement. "However, prime submarkets and trade areas are expected to remain resilient."

Alternative Power Sources To See ‘Exponential Growth’ To Fuel Data Center Expansion

Data centers cemented themselves as the commercial real estate industry’s hottest sector in 2024 as the artificial intelligence push from Big Tech firms fueled intense demand.

With this boom, available land and electricity are becoming a major issue for developers. Data center power consumption is expected to increase from 2.3% of the nation’s overall power consumption in 2023 to 6.6% in 2028.

This issue has spurred interest in tertiary markets and alternative power sources, areas that are expected to see a major boost in 2025.

Mintz partner Jeffrey Moerdler, a longtime data center industry veteran, said there will be “exponential growth” of alternative forms of energy, including nuclear, geothermal and wind energy, and he foresees the industry entering new markets that have never seen data center development before.

“Data center locations will continue to diversify out of the major existing hubs into surrounding areas, into tertiary cities and into more rural areas if they can get power and connectivity and not have a problem with local approvals,” Moerdler said.

“The question will be do you have good connectivity with multiple redundant providers there? And will the customers go there?” he added. “I think people will go to locations for different types of uses that can be further from the mainstream locations.”

CRE Investment To See A Resurgence

Investment in commercial real estate has fallen since interest rates began rising in the spring of 2022, and total investment volume through the first nine months of 2024 was at a decade-low. Elevated rates, high construction costs and slow rent growth have made it difficult to produce strong returns on real estate investments.

But Ryan Severino, chief economist and head of U.S. research for BGO, thinks that will soon change.

He said that falling interest rates should bolster economic growth and real estate demand, leading to a “tremendous opportunity” for CRE investments to produce high returns.

“The global CRE investment market could see its best performance in at least decades,” Severino wrote in emailed comments to Bisnow. “This very well could be the best global performance ever. We are tempering our comments a bit because global CRE data remains suspect, especially the historical data. But around the world the investment environment is clearly turning much more favorable, and the opportunity set is greatly increasing.”