Things are starting to look up for investors in US commercial real estate, according to the newly released 2025 Emerging trends in real estate report issued by the consulting firm PwC and the Urban Land Institute.
In this year's survey of commercial real estate professionals, lenders and investors, 65% of respondents indicated that expect their firm's earnings to be “good” or “excellent” in 2025a significant increase from the 41% who expressed this opinion during last year's survey. The share of respondents expecting “poor” or “weak” earnings also showed a sharp decline, according to the annual report. At the same time, these more optimistic expectations were for a return to historical averages rather than the double-digit returns of the 2010s, both organizations warned.
The majority of survey respondents (55%) said that buying activity remains too slow, while 58% indicated that not enough refinancing is taking place. The majority of respondents (75%) also think that development activity continues to be slow.
However, industry insiders expressed relief at the downward direction of interest rateseven if the Fed's 50 basis point cut in September was too modest to make much of a difference on its own. With the Fed signaling its intention to continue cutting the key interest rate, 80% of respondents said they expect lower commercial mortgage rates in 2025, which should help revive financing and sales activity. investments.
In addition, just over 40% of respondents expect to see a decrease in cap rates in 2025, while 40% expect them to remain stable and less than 20% expect them to rise.
While the outlook for capital markets activity has improved, commercial real estate industry experts now worry about shaky property fundamentals. Changes in tenant preferences caused by the pandemic have played themselves out to this point. However, the report noted that falling interest rates and a potentially slowing economy could signal slower earnings growth. As a result of these factors, while real estate professionals expect to see the start of a new expansion cycle in 2025, they predict that this market recovery will be slow and gradual.
When it came to the most favored property types, industrial/distribution centers, single-family and multi-family housing were rated as the best investment prospects in 2025, with ratings of 3.67, 3.60 and 3.59 on a scale of 1 to 5, where one equals “abysmal” and 5 equals “excellent”.
On the development front for 2025, single-family housing (3.60), industrial/distribution facilities (3.39) and multi-family housing (3.27) received the best ratings.
PwC and ULI researchers surveyed nearly 1,600 commercial real estate professionals and personally interviewed over 450 people for the report. Private property owners and developers represented 35.2% of respondents; professionals in real estate consulting and services firms and asset managers represented 20.1%; and construction and architecture professionals represented 7.7% of the survey sample. The remainder of the respondents were split between home builders/land developers, private real estate investors, lenders, investment managers and advisors, and various other groups involved in the industry.