Key Takeaway
• The real estate market is poised for an upturn as post-pandemic disruptions ease, with positive cyclical forces and interest rate reductions boosting transaction activity.
• Key investment factors include supply dynamics and modernized buildings, with a growing need for housing developments for the senior population.
• Positive cyclical forces are beginning to boost transaction activity and asset-value growth, although concerns about slower economic growth persist.
• The recent market correction was driven by cyclical factors like rising rates and yield compression reversal, along with structural changes such as shifts in office use.
• Investors are shifting portfolios towards emerging property types due to technological and demographic trends, with active management and careful selection being crucial.
• Investors face risks from geopolitical and economic uncertainties, as well as climate change.
• High mortgage rates have led to a mortgage lock-in effect, constraining housing supply, with home builders addressing the supply gap.
• The commercial real estate market is showing signs of bottoming out, with capital markets reopening and deal flow recovering.
• The global property market began its recovery in 2024, with lower interest rates in 2025 expected to improve liquidity.
• Active asset selection and management are becoming more important as the investment cycle evolves.
• Ongoing price declines and higher interest rates are challenging borrowers' ability to repay or refinance commercial-property loans.
• The rapid development of AI is driving demand for data centers, with new deal structures and a greater diversity of investors.
• Lower interest rates are expected to revive transaction activity and refinancing, benefiting brokers, investors, and lenders.
• The pandemic triggered shifts in how tenants use space, with a preference for more space at home and less dense suburban neighborhoods.
• Industrial real estate tenants are focusing on asset selection for warehouse space, with an emphasis on high power availability, automation capabilities, and sustainable building features.
• Dallas/Fort Worth, Miami, Houston, Tampa-St. Petersburg, and Nashville are highlighted as top real estate markets to watch.
• Pheonix, Austin, Dallas, Nashville, and Charlotte are identified as top retail real estate markets.
• The second Trump presidency presents opportunities and risks for commercial real estate, with potential impacts on trade policy, fiscal policy, and interest rates.
• Cap rates are expected to slightly compress in 2024, influenced by Treasury yields, rents, risk premiums, and GDP growth.
• Supply chain resiliency is driving the onshoring of manufacturing to North America, with Mexico and U.S. distribution centers playing key roles.
• Demand for data centers is skyrocketing, driven by cloud storage, mobile data traffic, AI, and other uses.
• Real assets fundraising has slowed in 2024, with infrastructure funds remaining attractive due to stable returns and lower volatility.
Market Profile - 2025
Market Outlook: The real estate market is poised for an upturn as post-pandemic disruptions ease. Positive cyclical forces are gaining strength, signaling a more favorable environment for investors. The Federal Reserve's recent pivot to reducing interest rates signals a peak in inflation and construction costs, which is positively impacting real estate markets by boosting transaction activity. However, not all dealmakers are eager to dive in, as rate cuts also suggest a slower economy that could affect net operating income (NOI) growth. The path to renewed market vigor may take unexpected turns.
Inflation trends suggest potential declines in mortgage rates, with economic growth remaining strong. There is cautious optimism for continued GDP growth and easing inflation, which could lead to lower mortgage rates in the future.
Investment Factors and Opportunities: Key investment factors today include supply dynamics and the modernized stock of buildings. Newer office buildings with amenities are preferred over older ones, and there is a growing need for housing developments catering to the increasing senior population. Positive sentiment in commercial real estate is building, with interest rates falling and transactional activity stabilizing, although the recovery is still in its early stages.
Market Sentiment: Positive cyclical forces, such as the Federal Reserve's interest rate reductions, are beginning to boost transaction activity and asset-value growth. However, the recovery is still in its early stages, and not all investors are ready to fully commit due to concerns about slower economic growth and its impact on net operating income (NOI). Despite these uncertainties, there is a growing sense of opportunity, particularly in modernized buildings and emerging property types. Investors are increasingly focusing on active management and careful selection to drive returns, as significant yield compression is unlikely. Overall, while challenges remain, the sentiment is gradually shifting towards a more positive outlook as the market stabilizes and new opportunities arise.
Market Profile - 2025
Market Correction and Structural Factors: The recent market correction was driven by familiar cyclical factors like rising rates and yield compression reversal, compounded by structural changes such as shifts in office use. The recovery will depend on various factors, with some market segments advancing faster than others, presenting both opportunities and risks for investors.
Investment Strategies: Investors are increasingly shifting their portfolios towards emerging property types due to technological and demographic trends, while others see value in traditional sectors at cyclical lows. Debt-refinancing stress and structural weaknesses in commodity-office assets will continue to influence price discovery in the market. With less yield compression, investors will need to drive returns through active management and careful selection. Understanding the key factors driving performance will be vital in this environment.
The current investment environment differs from the pre-pandemic period due to structural changes in demand for various property types. Despite these changes, there are opportunities in distressed sectors and well-located Class A office assets, which can benefit from demand spillover from prime properties.
Risks and Uncertainties: Investors face persistent risks from geopolitical and economic uncertainties, as well as climate change. The global economy's drift from net-zero targets raises concerns about more frequent and severe weather events, exacerbated by multiple extreme-weather disasters in 2024. Banks, especially community and regional ones, will manage their exposure to commercial real estate amid regulatory scrutiny, and construction loans will remain challenging to obtain.
The U.S economy has avoided recession and pulled off a remarkable soft landing. The continued appreciation of the U.S. dollar, which has risen by 12% since 2019. This puts pressure on U.S. companies by making their exports more expensive and on emerging markets by making their dollar-denominated loans harder to pay. A long-term risk to the U.S. economy is the federal deficit. This is not an immediate problem, since the overall debt-to-GDP ratio is rising slowly. President-elect Trump has proposed levying tariffs on foreign goods to reduce deficit, offsetting some effects of the tax cut extension. However the lack of clear strategy to reduce the deficit likely means higher interest rates and mortgage rate for longer.
Residential Real Estate Outlook: High mortgage rates have led to a mortgage lock-in effect, constraining housing supply. Home builders are working to meet the supply gap with more price-sensitive homes, and multifamily rentals are emerging as a solution to housing supply and affordability challenges. Rent levels are stabilizing or falling in some markets, contributing to a lower shelter component in the CPI.
Commercial Real Estate Outlook: The commercial real estate market is showing signs of bottoming out, with capital markets reopening and deal flow recovering. The recovery of banks from the 2023 regional banking crisis is also aiding the market. Office markets are seeing conversions to housing, and economic growth is driving fresh leasing activity in Class A office spaces.
Source: PwC, CBRE, Wharton, MSCI
Key Trends
1. Recovery
The global property market began its recovery in 2024 after a slowdown that started in mid-2022. This recovery is still in its early stages, with lower interest rates in 2025 expected to improve liquidity. Investors are becoming more selective, focusing on sectors like living, industrial, and assets tied to technological and socioeconomic shifts. Notably, there is strong demand for data centers and new energy infrastructure, as seen in Blackstone Inc.'s $16 billion purchase of AirTrunk.
Fundraising for property investment remains challenging due to low deal activity and the rise of private credit. However, growing distress levels may offer opportunities for well-capitalized players to acquire assets at a discount. Office and retail sectors have faced significant value destruction, though some investors are starting to return, attracted by potential bargains.
Real estate capital markets are showing signs of recovery, with improving liquidity and tighter pricing. The CRE debt markets are still undersupplied but are expected to improve as interest rates decline and more properties transact. Sales transactions are stabilizing but remain below pre-pandemic levels, with varying impacts across property types. Prices are beginning to stabilize, encouraging more market activity, though a full recovery to pre-pandemic levels will take time. Overall, the market is cautiously optimistic, with expectations of gradual improvement and a return to normalcy.
2. Investment pendulum swings back to asset selection
As we enter a new investment cycle, industry conversations are increasingly focused on shifting performance drivers and the heightened role of active asset selection and management. The challenge for investors is clear: With market conditions evolving, the playbook for delivering returns is changing.
Picking the right assets has always been crucial for investors in commercial real estate. Every property is unique and, unlike in public equities, investors cannot buy the market. As such, investors must carefully balance top-down allocation strategies determining exposure across geographies and property types with the granular, bottom-up asset-selection and asset-management decisions. The interplay between these two approaches has grown increasingly complex as the real-estate market becomes more dynamic, influenced by macroeconomic shifts, technological disruption and evolving tenant demands. Understanding the drivers of performance whether stemming from strategic allocation or asset selection is paramount for investors seeking to optimize returns.
Attribution analysis can provide insights into the evolving nature of performance drivers in a rapidly changing environment. Evidence from the MSCI/PREA U.S. ACOE Quarterly Property Fund Index highlights this variability: Historically, selection accounted for around 63% of the deviation from the benchmark among funds, but the relative influence of allocation and selection has shifted over time as market regimes have changed.
As the real-estate market stabilized following the 2008 global financial crisis and its aftermath, secular trends such as the retail apocalypse and the (later) shift to remote work elevated allocation's importance, with sector strategies shaping outcomes. The pendulum now appears to be swinging back toward selection, however. In today’s environment of higher interest rates, with less support from
Key Trends
capital markets, fundamental asset-level performance has become a key focus for many investors. Without yield compression to drive growth, the unique attributes of individual assets are critical.
3. Underwater assets come to light
Ongoing price declines and a regime of higher interest rates put in doubt the ability of some borrowers to repay or refinance their commercial-property loans. Concerns about borrowers and their lenders are global. In Europe, property prices and values have undergone substantial corrections since mid-2022, meaning that many properties sitting on investors' books will likely be worth less than they were originally acquired for, especially those bought close to the peak of the market in 2021. When asset values do not meet or exceed loan obligations, prospects for refinancing become grim.
In the U.S., we estimate that nearly USD 500 billion of loans are set to mature in 2025 (based on data as of the end of Q3 2024). We marked to market each asset using our hedonic price indexes and found that if these loans were to mature at Q3 2024 price levels, approximately 14% would be flagged as underwater, meaning their current asset values have fallen below the outstanding loan balance.
U.S. offices will likely face the bleakest prospects for refinancing in 2025. Nearly 30% of maturing office loans, or approximately USD 30 billion, is associated with properties estimated to be worth less than the debt secured against them. The apartment market has USD 19 billion of properties worth less than the loans associated with them, accounting for 10% of maturing 2025 loans in that market. Given that loans made during periods of low interest rates and high property valuations are particularly vulnerable to asset-value shortfalls, it should come as no surprise that nearly 70% of these apartment loans have 2022 origination dates, when apartment values were at their peak.
Key Trends
4. Investors get to grips with physical climate risk
Extreme weather events, which can negatively affect the value of real-estate assets through higher insurance premiums as well as repair and disruption costs, are predicted to become more common. But is the risk being priced accordingly given the potential costs?
We examined data from the MSCI Real Capital Analytics transaction database to explore the relationship or lack thereof between transaction yields and physical climate risk, using the MSCI Climate Value-at-Risk Model. An analysis of multifamily properties located in the Southeast U.S., a region prone to extreme-weather events, found only a marginal spread in transaction yields between apartment properties with a high or very high physical climate risk and those with a low or medium risk Indeed, higher-risk assets traded at a premium to those deemed to be at lower risk.
As climate risks intensify, pricing should adjust to reflect the increased risk to property values from greater exposure to extreme-weather events. Therefore, the current market imbalance where high-risk assets offer yields on par with lower-risk properties in a region susceptible to physical hazards will likely not last indefinitely, especially as insurance costs continue to rise for higher-risk assets.[4] But investors can get a head start by factoring in the growing impact of climate-related risks on property values and reshaping portfolios to reflect the threat from extreme weather.
5. Property investors seek a ride on the AI train
The rapid development and democratization of AI, through the development of tools like ChatGPT, has major implications for property. One is an explosion in demand for data centers to power this emerging technology. One of the biggest commercial-property deals in 2024 was Blackstone’s aforementioned acquisition of data-center operator AirTrunk. Moreover, billions of newly committed capital is targeting the development of new data centers, including GIC’s USD 15 billion joint venture with operator Equinix and BlackRock’s USD 30 billion AI partnership alongside private-equity firm Global Infrastructure Partners, Microsoft Corp. and sovereign-wealth fund Mubadala.
The rise of AI has resulted in not just an explosion of demand for data centers, but a different type of data center that features rack densities much higher than those targeted at cloud computing. In addition to computational intensiveness, these data centers are also capital-intensive.
The result of these changes is that the investment landscape for data centers is changing rapidly, with generalist property investors competing with the traditional infrastructure investors active in the sector. The arrival of this new wave of real-estate investors has brought with it a greater diversity of deal structures, such as those separating operator-focused “opcos” from the real-estate owning “propcos.”
Getting real-estate investors comfortable with this asset class has profound implications for the tradability of these assets and knock-on impact on market liquidity. In many mature markets like the U.S., U.K. and Japan, transaction yields have compressed significantly over the past 10 years, and as of today stand in line or even below the likes of traditional markets like industrial and offices. A similar trend is happening in markets at an earlier stage of the curve like those in continental Europe and Asia-Pacific.
Investors should be aware that the data-center market has its own set of idiosyncratic risks. For one, operating a data center requires many considerations and expertise that are unique to the asset class. Data transparency is also much lower than that for traditional property types, with information on rents and transaction yields typically harder to come by. Therefore, investors with a longer history in the sector, as well as those with a bigger portfolio, have a substantial informational advantage over new entrants.
6. Lower Interest Rates
The real estate industry has long relied on low interest rates, which became the norm following the 2007-2008 global financial crisis and were reinforced during the COVID-19 pandemic. These low rates encouraged the use of leverage to enhance returns. However, this era of cheap credit ended abruptly in March 2022 when the Federal Reserve began raising interest rates to combat inflation. The Fed's aggressive rate hikes, totaling 11 increases and pushing rates over 5%, caused significant anxiety in the commercial real estate (CRE)
Key Trends
sector, leading to a sharp decline in sales transactions and lending volumes.
Despite the Fed's efforts to control inflation, the economy remained robust through 2024, with strong GDP growth and a healthy job market. Consumer spending and employment growth continued to drive economic performance, and the stock market frequently hit new highs. The Fed's success in taming inflation has set the stage for potential future rate cuts, aiming for a "soft landing" of the economy.
The outlook for CRE is mixed. Lower interest rates are expected to revive transaction activity and refinancing, benefiting brokers, investors, and lenders. However, slower economic and job growth could dampen tenant demand, affecting occupancy and rent growth. The Fed's shift in monetary policy has provided greater certainty, encouraging market participants to re-engage. While uncertainty remains, particularly due to political and geopolitical risks, there is a growing consensus on key financial metrics, allowing the real estate industry to move forward and find a new equilibrium.
7. Building Boom, Tenant Boon
The pandemic triggered profound shifts in how tenants use different types of space: how much, where, and what kind. The changes began with the lockdown as many sectors of the economy were forced to adapt to new ways of operating, and many of those adaptations have endured in some form. By now, these shifts have either largely played out, or their direction is reasonably foreseeable. Office workers commute to the workplace less frequently; consumers shop more online; and more goods than ever are stored in warehouses. All these effects have altered space usage patterns. The pandemic also forced significant changes in the types and locations of homes that households want to buy and rent. People want more space at home to work and prefer less dense suburban neighborhoods, which they perceive as safer and healthier. Less heralded but perhaps even more remarkable is that overall space demand has more than recovered in most sectors. Indeed, occupied space now exceeds prepandemic levels as demand remains robust across most property types. Not every sector, of course. A painful reckoning is taking place in the office sector, and few experts expect office space demand to return to anything approaching pracademic levels (see the discussion in the chapter 2 office outlook).Despite the broad demand recovery, vacancy rates are rising across many property types as surging supply outpaces absorption in many markets. All this new construction is swinging the power pendulum to the tenants. Tenants are exploiting softer market conditions in different ways in different property sectors. In some sectors, tenants are simply leveraging rising vacancies to negotiate lower rents. However, in other sectors, occupiers are taking advantage of the availability of a new class of higher-quality construction to upgrade their workplaces and leave behind their older, less functional space. These moves are creating a performance chasm between newer and older buildings.
8. Industrial Smart Growth: The Next Stage of Tactical Network Optimization
Industrial real estate tenants are employing a new smart-growth strategy for the next phase of leasing, placing greater emphasis on asset selection for warehouse space when considering future expansions. Infrastructure requirements for logistics real estate have expanded to include high power availability, automation capabilities, and sustainable building features. Supply network diversification, including through nearshoring and onshoring of operations, has become a key driver of location selection for industrial users.
Source: PwC, CBRE, Wharton, MSCI
