If current trends hold, the commercial real estate (CRE) market is poised for growth in 2025, with investors anticipating increased activity.
According to recent surveys, 70% of CRE investors expect to acquire more assets in 2025 compared to 2024. Nearly half of investors foresee selling more properties as well. While 54% believe overall investment activity will begin to recover in the first half of the year, three-quarters expect their own investment activities to pick up during the same period.
However, this optimism comes despite two major challenges. It is projected that the yield on 10-year U.S. Treasury bonds will remain above 4% throughout the year, with interest rates expected to stay volatile and high over the long term.
Interest rates for long-term loans like mortgages are influenced by the risk-free rate, represented by the 10-year Treasury yield, as well as the risk premium lenders apply. As of last Friday, the 10-year yield stood above 4.60%. Financial analysts predict rates will rise and likely remain above 4.60% as the year unfolds.
If a significant number of investors increase their purchasing volume, it is expected to drive more competition for properties, which would likely lead to price stabilization. This shift could attract more capital, with investors either maintaining or increasing their allocations to real estate.
A slight majority of investors believe favorable pricing will be the key factor driving increased allocations. However, while there have been widespread expectations for distressed pricing to emerge, these have not yet materialized. It is possible that the anticipated wave of “extend-and-pretend” strategies may eventually lead to significant distress, but so far, that has not happened despite multiple past predictions.
Additionally, the Federal Reserve’s potential interest rate cuts — even if they occur at a slower pace than expected — combined with pro-growth policies from the current administration, could reduce the denominator effect and allow investors to allocate more capital into CRE as they reevaluate and rebalance their portfolios.
That said, comparisons to 2024 and prior years suggest that many in the industry have predicted improvement in the following year, only to be met with continued uncertainty. As 2025 begins, the impact of Treasury yields and interest rates casts a long shadow over the near-term outlook for the CRE market.
Source: GlobeSt.