Will 2025 Be A Pivotal Year Of Recovery In Commercial Real Estate?
As we embark upon 2025, we remain in the middle of a massive transition in the investment landscape. The momentum of the distant past (where unusually low interest rates helped propel growth, asset appreciation, and easy leverage) has faded, replaced by a more challenging, higher-interest-rate environment that requires an increasingly strategic approach. But we believe a new era of recovery is upon us.
As many central banks have begun cutting interest rates, fundamentals are improving, more capital is coming into private markets, and global growth is strengthening. Broader themes such as notable global demographic shifts (that are helping to reshape economies, industries, and geographies); the rise of AI and automation (which are transforming industries and workplaces); and a continued global focus on decarbonization are also guiding our increasingly positive investment thesis. These are all reasons why we approach the new year with confidence and optimism.
6 reasons to be hopeful about commercial real estate investment in 2025
In fact, it’s our view that we’ll likely look back on 2025 as a pivotal moment of recovery in many areas of the commercial real estate sector. Below, we outline six of the top investment themes we’re tracking in 2025:
1. We’re in a “buy” cycle
Analysis by Hines Research has found that as of Q3 2024, just over 66% of global markets were in some phase of the “buy” cycle, the highest level since 2016 and akin to the early years of the post-global financial crisis recovery (see chart below). This is a similar level to the mid-1990s as the US emerged from the savings and loans crisis. While both periods had challenges, they were excellent vintages to put money to work.
Percentage of global markets in various real estate cycle phases. Sources: NCREIF, CoStar, Green Street, CBRE, JLL, MSCI, and Hines Research. As of Q3 2024. Note: Illustrates the percentage of the 534 global real estate markets (A market being defined as a metro/property type combination such as Paris Office or Los Angeles Retail, etc.) tracked by Hines Research in each of the various cycle phases (including Early Buy, Buy, Strong Buy, Late Buy, Prepare to Sell, See, Late Sell, and Hold/Monitor) since Q1 1990.
2. Renting is gaining traction
Additional analysis by our research team (using data from Oxford Economics and Eurostat, as well as Census data from the US, Canada, Korea, Australia, Hong Kong, and Japan (as of Q2 2024) estimates that we’re short about 6.5 million housing units in aggregate for a group of 14 major developed economies. There is also a significant lack of housing affordability globally. In this environment, households have shown clear momentum for renting over buying. This underscores our belief that the global living sector will likely be a strong play in 2025.
3. Retail fundamentals are healthy
The retail sector has “rightsized” and is experiencing a more balanced market where new supply is limited, and the process of sorting winners and losers has mostly played out. Across the four major property types in NCREIF, the US retail sector has ranked first in total returns in each of the past eight quarters through Q3 2024. Retail also has the second-highest percentage of markets in some phase of the buy cycle globally.
4. Embedded industrial NOI growth
Despite moderating fundamentals, the industrial sector remains attractive due to embedded net operating income (NOI) growth. We expect renewed rent growth as supply and demand come into closer alignment in 2025.
5. Office credit opportunities are unfolding
The office sector has regional variances, but dislocation in the US office capital markets specifically has created opportunities across the capital stack. As existing loans mature, the lack of traditional financing needed to meet refinancing requirements has created a situation where debt may be more attractive than equity.
6. There are bright spots in alternative sectors
Opportunities within niche sectors vary significantly across regions. Given a lack of data, success often depends on understanding local market dynamics. We believe that areas including student housing, self-storage, and data centres are building strength due to unique demand drivers.
