Decreasing interest rates and depressed commercial real estate (CRE) values will provide a significant opportunity for well-capitalized buyers with a long-term investment horizon to acquire high-quality assets at compelling valuations in 2025.
Many properties purchased and financed at 2021 to 2023 valuations are now facing loan maturities at a time where higher interest rates and higher cap rates are restraining loan proceeds. Should these debt maturities combine with weaker than expected net operating income, we may see impressive core assets come to market at attractive prices. For investors with capital and a long-term vision, 2025 may mark the beginning of strong CRE investment returns.
After a peak to trough decline of 18.70 percent and seven straight negative quarters, the National Counsel of Real Estate Investment Fiduciaries (NCREIF) NPI ODCE index notched a 0.25 percent gain in the third quarter of 2024.1 The present decline was the second largest drawdown in the history of the index, behind only the Great Financial Crisis (GFC), and one of only three sustained declines in the index’s history. In the five-year period after both the Savings & Loan Crisis (S&L Crisis) and GFC, commercial real estate strongly outperformed its long-term average returns, posting double-digit annual gains verses the 7.95 percent gain since inception.1 This provides an opportunity to achieve value-add-like returns while investing in core real estate assets.
The massive transaction volume between 2021 and 2023 created a large amount of debt to go with it. And much of the debt originated will be coming due in the next 12 to 24 months.
While we expect lenders to continue to have a preference to extend and work out situations with borrowers, this dynamic could put pressure on less-capitalized owners, creating a meaningful opening for stronger buyers to acquire these assets. Those assets with strong fundamentals but inefficiently structured capital stacks should come to market at attractive valuations as a result.
Data compiled Aug. 19, 2024. Data represents the aggregation of 3.6 million commercial real estate property mortgages, sourced from various tax lings from approximately 75% of US counties. While roughly 60% of the loans were originally missing a maturity date, analysis used a random forest model to impute the missing values. Since the random forest model varies each time it is run, the values shown represent averages across five runs.
The current economic growth environment is tepid but stable. The new administration in the White House could potentially lead to lower taxes and a more favorable regulatory environment over the next four years. This may be offset, however, by the fundamental constraints to growth facing the economy: demographics, debt, and policy. A recession risk still exists and should be monitored closely, but no imminent warnings are present. The labor market is showing some cracks that require close attention as the year unfolds, but income growth remains strong and jobless claims are low and stable. Leading indicators show some weakness but have recovered from levels typically associated with recessions.
Note: Shaded areas represent recessions as determined by the NBER Business Cycle Dating Committee
Despite an increase in mortgage rates, the Case-Shiller Home Price Index is at an all-time high,4 driven by the continued demographic demand for housing, coupled with an extremely low supply of existing homes for sale. While the potential for declining interest rates may bring some relief to homebuyers, much of the benefit would be offset by increasing home prices. Why? Because a lower interest rate will bring yet more buyers into the market, driving up prices given the housing market supply constraints. This will continue to drive multifamily/rental housing demand in 2025 with certain subsectors of particular interest including manufactured housing and build-to-rent.
Note: Does not include estimates for homeowner's or renter's insurance. Assumed down payment of 10% with prevailing and forecast interest rate.
Both domestic population migration between states and immigration from abroad will have an outsized impact on CRE demand going forward, especially as organic growth from births continues to wane. It is estimated that 75 percent of population growth in the next decade will come from immigration and is concentrated on a few key states – Florida, California, and Texas.6
Self-Storage: Experienced largest supply increases from 2018 to 2020, with new supply growth steadily declining, projected to level-out around 1.5 percent to 2.0 percent as percentage of existing inventory.8
Student Housing: New bed supply growth continues to fall, with average beds delivered expected to decline to less than 16,000 beds in 2027.9
Multifamily: Construction pipeline peaked during the first half of 2023 and annual supply growth is expected to start trending lower in 2025. New supply lags units under construction by about six quarters. The sharp decline in units under construction signals a coming decline in new supply hitting the market which we should begin to see toward the end of 2025.10
Senior Housing: Construction starts are at levels last seen in the aftermath of the Great Financial Crisis with only 7,100 units breaking ground as of 3Q 2024. At the current pace of construction, a severe shortage of units will emerge, creating conditions for very strong fundamentals going forward.11
The 2025 outlook is promising for the commercial real estate market, representing a great vintage year for acquiring core assets that have the potential to generate value-add-like returns for investors with a long-term perspective. With the current macroeconomic landscape still timid, a heavier emphasis on the intersection between real estate and demographic trends will determine allocations across commercial real estate sectors.
1 NCREIF NPI ODCE Index
2 S&P Global. Commercial real estate maturity wall $950B in 2024, peaks in 2027. September 2024.
3 The Conference Board. US Leading Indicators. Press Release. December 2024. Note: Shaded areas represent recessions as determined by the NBER Business Cycle Dating Committee
4 https://www.spglobal.com/spdji/en/indices/indicators/sp-corelogic-case-shiller-us-national-home-price-nsa-index/#overview
5 CBRE Research, CBRE Econometric Advisors. Q3 2024.
6 PWC & Urban Land Institute. Demographics Steering Real Estate Markets in 2025 and Beyond. Accessed December 2024.
7 Bureau of Labor Statistics, John Burns Research and Consulting LLC (Data: Jul-24; Pub: Sept 24). As seen in the Burns U.S. Demographics Insights and Strategies. PWC & Urban Land Institute. Demographics Steering Real Estate Markets in 2025 and Beyond.
8 Yardi Matrix.
9 RealPage/Axiometrica subscription data.
10 RealPage subscription data.
11 NIC. Senior Housing Demand Outpaces New Supply in 3Q24. October 2024.