Five Predictions for Commercial Real Estate in 2025

1. Supply Shortages Will Worsen for In-Demand Assets

New building activity is slowing across the U.S. and Europe due to high construction and financing costs coupled with labor constraints. In the U.S., new office completions are projected to decline by 73% from their peak, while industrial completions will drop by 56%. The U.S. will see a 73% decline in new office completions from peak levels and a 56% drop in industrial assets. 

Key Implications for Investors:

• High competition for quality assets will elevate the value of retrofitting and redevelopment.

• Market dynamics will demand a deep understanding of supply-demand trends to identify lucrative opportunities.

• Data centers, driven by surging AI requirements, are among the few asset classes bucking this trend. The demand is fueled by industries like e-commerce, cloud computing, and generative AI applications, which require massive data storage and processing capabilities. However, even data centers face supply shortages due to limited construction capacity and high material costs.

2. Early-Mover Advantage May Peak in 2025

As CRE enters a new liquidity cycle, institutional investors are returning with heightened interest. Falling interest rates, which have dropped by an average of 75 basis points over the past six months and narrowing bid-ask gaps signal increased transaction activity and renewed competition for quality assets.

Opportunities for Investors:

• Capitalizing on supply shortages by focusing on high-performing sectors such as living, logistics, and data centers.

• Exploring markets benefiting from nearshoring trends, particularly in logistics and industrial sectors.

• Leveraging the ongoing flight to quality to invest in top-tier office spaces in prime locations.

3. Corporate Confidence in CRE Strategies Is Growing

After years of rightsizing, corporations are once again planning portfolio expansions. Office attendance policies are shifting, with many companies moving toward a four-day office presence. This trend is particularly prominent in industries like technology and finance, where hybrid work models are reshaping traditional office requirements. In contrast, manufacturing and healthcare sectors continue to emphasize in-person attendance, highlighting regional and industry-specific variations in office strategies. This requires a more deliberate approach to space selection and utilization.

Trends to Watch:

• Increased demand for vibrant, mixed-use CBD locations and sustainable buildings.

• Companies investing in flexible, future-proof spaces to accommodate evolving workforce needs.

• Heightened focus on employee experience and workplace amenities to attract talent.

4. Obsolescence Will Drive Strategic Asset Decisions

A significant portion of CRE assets risk becoming obsolete due to shifting tenant preferences, sustainability mandates, and urban development trends. In key markets, $933 billion to $1.2 trillion will need to be invested over the next five years to maintain asset viability.

Strategies for Asset Owners:

• Investing in retrofitting and repositioning aging assets to meet modern demands.

• Exploring conversion opportunities, such as turning underutilized office spaces into residential or hospitality uses.

• Collaborating with stakeholders to navigate regulatory and physical challenges in redevelopment projects.

5. Decarbonization Will Accelerate

With rising energy costs and regulatory pressures, such as emissions reduction targets and stricter building efficiency standards, decarbonization is becoming central to CRE strategies. Retrofitting to reduce energy use can unlock substantial cost savings while enhancing asset value.

Steps to Consider:

• Conduct comprehensive energy audits to identify high impact retrofitting opportunities.

• Prioritize mechanical, electrical, and plumbing upgrades to achieve significant energy savings.

• Embrace AI-powered technologies for continuous optimization of building performance.

Navigating Recovery, Risk, and Resilience

2025 will be marked by a shift from defense to offense in the CRE market. While the recovery cycle is underway, success will hinge on agility and resilience amid financial and policy uncertainties. Investors and developers who understand nuanced market dynamics and act decisively will find abundant opportunities to create value.

For real estate investors, the key takeaway is clear: those who adapt to changing market conditions and leverage early-mover advantages will be best positioned to thrive in the next cycle.