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AlternativesFebruary 3, 2025

Commercial Real Estate: Is 2025 Going to Be Different?

Economic growth, improving real estate fundamentals could drive a moderate recovery in real estate investment activity.

By Debbie Carlson

Art by Melinda Beck

Elevated interest rates, inflation, a shift in where people work and an uneven global economic recovery battered the commercial real estate market for the past few years, but the sector could see a moderate recovery in investment activity in 2025 as inflation eases and some global central banks loosen monetary policy.

Pedro Guazo, representative of the secretary-general for the investment of the $95.3 billion United Nations Joint Staff Pension Fund, says the fund is “cautiously optimistic” for 2025.

“The question we ask internally is, ‘Did the trendline reverse?’ rather than, ‘Is this the absolute bottom?’” Guazo said in an email. “In that respect, we believe we are near the cycle’s bottom.”

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But, like everything in real estate, location matters.

Institutional investors and managers see selective opportunities in the U.S., Australia, the U.K. and Europe, but China’s markets are still considered too risky for 2025. While location matters, so do sectors. Overall, traditional office real estate remains overvalued, as the work-from-home phenomenon continues to reshape work life, investors and managers say, but non-traditional real estate, such as housing and data centers, appeals.

Unlike previous real estate cycles, some managers are weighing climate change impacts and insurance costs in their calculations as the combination of higher property values and more unpredictable and destructive natural disasters will affect long-term values.

For investors still wary of real estate, Bert Crouch, head of North America at Invesco Real Estate, suggests now may be the time to start looking, especially for those seeking an alternative to equities. After recent weakness, the asset class is under-owned and, in the U.S., he says the market has broadly bottomed. According to Crouch, in the five-year periods after 2001’s dot-com bubble and following the global financial crisis in 2009, investors who bought real estate saw unlevered returns in the low to mid teens.

“Simply put, you’ve been rewarded for leaning in early,” he says.

Invesco’s Crouch also points to opportunities in real estate lending by private credit investors as attractive. It’s still his top idea for 2025 for real estate, across sectors. “I would rather lend than buy,” he says.

He says most loans Invesco makes have 65% loan-to-value ratios on high-quality real estate. Invesco can lend at rates about 250 to 300 basis points greater than the secured overnight financing rate of 4.3%, giving a yield of about 7%. Using some leverage, that yield can rise to 12%, he adds.

Certain Housing Areas Attract Interest

In many countries, housing demand outstrips supply, as demographics shift and lifestyle preferences evolve, making housing a compelling choice for investors and managers. Immigration and household growth increase demand, while higher interest rates make mortgages costly, forcing would-be buyers to rent. Investors see opportunities in multi-family housing, single-family rentals, student housing and senior living.

Jeroen Beimer, head of research at the 16-billion-euro ($16.68 billion) manager Bouwinvest Real Estate Investors, which manages real estate portfolios for Dutch and international institutional clients, says 2024 yielded strong rental growth that he expects to continue.

“If you can find places where there will be substantial rental growth, that’s where we expect in the coming two or three years that these markets will outperform,” he says.

Among the top locations for rental growth are apartments and single-family housing in the U.S. Sun Belt states, which continue to see migration of workers and businesses, Beimer says. Guazo agrees, noting that the U.N.’s Joint Staff Pension Fund is targeting the same sectors. He says 70% of the portfolio is anchored in the U.S.

Beimer says he sees tailwinds in growing metro areas in Canada and Australia, but also some large cities such as Singapore, Tokyo and Osaka, Japan. In North America, he sees student housing and senior housing as other strong sectors.

Stephen Hayes, head of global property securities for Sydney-based $157 billion manager First Sentier Investors, points to opportunities in Australia, including land-lease communities—which often cater to people age 55 and older—offering returns (based on implied capitalization rates) of 5.8% and self-storage facilities, which have an implied cap rate of 7.3%.

Guazo also likes Australia’s prospects, particularly student housing, while in Japan, he says there are “compelling” multi-family opportunities.

Data Centers Grow in Multiple Markets

Data centers also remain attractive, according to most sources. Guazo says the U.N. fund has been investing in the sector since 2017 and has expanded its exposure globally.

“Demand driven by AI is unprecedented, with growth in data consumption significantly exceeding even our most optimistic expectations,” he says.

Even in Europe, where many real estate markets are sluggish, data center growth is a highlight. Hayes points to demand in cities such as Paris and Frankfurt, Germany, and data centers are quickly expanding across Spain, with implied cap rates of 9%.

The slowing economy in the U.K. has opened rare opportunities in London, Hayes says, particularly in publicly traded real estate in London’s West End. Prices are down there because of macroeconomic headwinds stemming from the government’s new fiscal budgets, which raised the national living wage and drove business costs higher. General valuations in London’s West End have an implied 6.1% cap rate.

“Looking through that noise, we see over the next five to 10 years, some very good returns to be had, given the implied valuation,” Hayes says, adding that London’s West End is “just such a unique real estate market, it really can’t be replicated. And the implied valuations, we think are just extremely appealing.”

The logistics market, which includes warehouses, has been attractive for a while due to the boom of online shopping, but Beimer and Hayes suggest that supply is catching up with demand. Hayes is cautious about logistics in an era when the U.S. intends to impose tariffs on imports.

“Some markets will do fine, and others will be impacted by tariffs, and it’ll be pretty tough,” Hayes says. “So it’s not looking extremely appealing to us.”

Insurance Costs to Rise

Rising insurance costs will have long-term implications for returns. Climate-change-driven natural disasters are becoming more unpredictable, and more high-value real estate is being built in areas that have increased risk for natural disasters, driving up costs.

Bouwinvest’s Beimer says that even if a property is not at a particularly increased risk for climate change impacts, higher insurance costs could still be a factor.

“If you are in investing in real estate, and the real estate insurance costs are too high … then it’s affecting the real estate markets in a second-order effect,” he says. “Maybe in the longer term, the second-order effects might be having a larger impact than we now anticipate.”

Hayes concurs. He is less concerned about the individual impacts of specific natural disasters, because of his portfolio’s diversification, than he is about the broader insurance costs.

“We need to factor in those increases in costs, which are likely to continue to be quite material over time, and try and get an understanding of what that’s going to do to operating margins and valuations,” he says.

Institutional Investors See Resilience in Commercial Real Estate

While the industry is forever changed following the pandemic, portfolio managers expect a rebound ahead.

By Matt Toledo

Art by Melinda Beck

Five years after the start of the COVID-19 pandemic, the commercial real estate market is forever changed. Office space has been a drag on investors’ portfolios for the past several years; the move toward remote work has been devastating to the prices of office buildings.

But many institutional investors think the downturn is nearing an end, and they see buying opportunities as the market bottoms. Leasing is up, and demand for office space appears to be coming back. For institutional asset allocators, the best time to buy commercial real estate could be right around the corner.

The End of WFH?

The era of working from home appears to be coming to a close, with more and more companies, especially New York-based financial institutions, mandating a return to the office five days per week. JPMorganChase and Goldman Sachs are among these large employers calling for a return to the office.

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“You’ve … seen some return-to-work announcements from some really big employers,” says Greg Kuhl, a portfolio manager on the global property equities team at Janus Henderson, who also points to large tech firms, like Amazon, mandating that employees be in the office five days per week.

KPMG’s 2024 CEO outlook found 83% of CEOs surveyed said they expected a full return to the office within the next three years.

Chad Tredway, head of real estate in the Americas at J.P. Morgan Asset Management, says the stars are aligning for office space demand.

“With strong economic growth, more workers returning to the office, and fundamentals improving, especially for top-quality assets, the sector appears to be very well positioned to see gains in the coming quarters,” Tredway says.

State of the Market

Yet the number of new office construction starts continues to plummet, which could significantly affect supply-and-demand dynamics. According to the CBRE Group’s 2025 outlook, new supply is expected to fall to 15 million square feet this year, well below the 10-year average of 44 million.

“The development pipeline is at the lowest level since the global financial crisis, representing less than 1% of stock across the country, while conversions of former office buildings are accelerating,” Tredway says. “Combined, these improvements are making for the most favorable supply-demand dynamic the industry has seen since the beginning of the pandemic.”

Glenn Brill, managing director in FTI Consulting’s real estate solutions practice, says the trends appear favorable for office space investments.

“Given the considerable amount of distress in the office market, it appears a consensus may have formed that the office market has bottomed out,” Brill says. “Buyers are seeing pricing below replacement cost and opportunities for redevelopment, with the hope for future office space demand as large employers continue to commit to ‘in-the-office’ culture and seek a quality work experience for their employees.”

Janus Henderson’s Kuhl says fundamentals are pointing to a market bottom. Net office absorption—how much space is leased net of how much is delivered—recently turned positive for the first time in years, Kuhl says.

“From a new-supply perspective, that was positive in the fourth quarter [of 2024] for the second time post pandemic, and it [had been] been negative for seven or eight quarters in a row,” Kuhl says.

Deloitte, in its 2025 commercial real estate outlook noted that a rebound for commercial real estate depends on the future of global interest rates.

“For some in the commercial real estate industry, the shift to prospective rate cuts has boosted sentiment for the remainder of 2024 and 2025,” the report stated. “That said, a single rate cut alone is not expected to immediately alleviate lingering concerns around refinancing risk for maturing loans or make capital and debt for acquisitions suddenly cheaper or easier to attain.”

Best Buying Opportunities

Kuhl says New York has been the best market for offices from a fundamental perspective; the city does not have enough Class A—the most expensive—office space, to meet demand. He also pointed to markets like Boston and some Sun Belt states as improving. West Coast markets, including in California and Seattle, are not seeing signs of improvement, but they also are not getting worse, he adds, backed up by J.P. Morgan’s Tredway.

“The tip of the spear for the recovery continues to be top-quality buildings,” Tredway says. “In Manhattan, premier assets are essentially back to pre-pandemic utilization rates, while Class A properties are at 85% and rising. Clearly, there are challenged pockets of the market, but with 60% of the market’s vacancy concentrated in the bottom 10% of buildings, it is a smaller subset than many think.”

Leasing activity is also picking up. In the third quarter of 2024, office leasing in Manhattan grew by 5.6%; while modest, it was the market’s strongest quarterly volume in two years. In the first three quarters of 2024, leases were signed covering 23.14 million square feet. While still below 2019’s leasing volume of 42.97 million square feet, the availability rate fell to 17.3%, the lowest in Manhattan in 18 months.

Kuhl also makes the case for investors adding exposure through real estate investment trusts.

“It’s not uncommon to see office buildings that could be valued at a billion dollars or more,” Kuhl says. “For an investor, that could be a lot of risk concentrated in one asset. I think this is where buying the shares of a REIT are attractive from a diversification perspective, because you can get that exposure without deploying so much capital.”

Who’s Buying?

With trends indicating a potential turnaround on the horizon for commercial real estate, some managers are already getting in early.

“Recently, [Norges Bank Investment Management] purchased office assets in Boston, San Francisco and Washington, DC,” Brill says. “No doubt they were attracted by the high quality of the assets in relation to price today and anticipated market conditions into the future,” referring to the fund’s December 2024 purchase of a $976.8 million stake in an office portfolio across those markets. The $1.573 trillion fund has a 1.7% allocation to real estate.

Korea’s National Pension Service recently announced an $800 million venture with Almanac Realty Investors, the private real estate investing arm of Neuberger Berman, to invest in real estate platforms and . The pension fund established a real estate platform investing team in 2024.

“As the real estate investment landscape evolves, platform investing has emerged as a transformative trend reshaping the industry,” said Insub Park, senior portfolio manager of NPS’ real estate platform investment team, in a statement with the Neuberger partnership announcement. “This approach not only optimizes value creation, but also aligns with long-term growth strategies, making it a cornerstone for forward-thinking investors.”

In 2023, sovereign wealth funds increased their investments in real estate by 50% from the year before, according to data from the International Forum of Sovereign Wealth Funds. The increase represents $14.7 billion in investments, a level of commitment not seen since 2018.

Still, some institutional investors are staying on the sidelines for now. The largest public pension funds in Canada are significant investors in real estate, and in the past few years, their losses from the asset class are well publicized. In fiscal 2024, PSP Investments took a 15.9% hit in its real estate portfolio, while CPP Investments sold a 29% stake in a Manhattan office building at 360 Park Avenue to Boston Properties for the token sum of $1.

“With a [negative 15.9%] return, Real Estate was hit particularly hard by the structural changes in the office sector and supply-demand dynamics in certain regions as well as higher rates, which have pushed prices down and cost of financing up,” stated PSP Investments’ 2024 annual report, published last March.

CPP Investments had an 11.3% allocation to real estate in fiscal 2020. By fiscal 2024, it had shrunk to 8%. In its 2024 annual report, the fund attributed low returns—including 0.7% in the real estate portfolio—to the “transition towards e-commerce and the impact of evolving hybrid workplace trends.”