2025 Real Estate Outlook: Major Trends Impacting Buyers and Investors

Written by David Dodge

As we step into 2025, the real estate landscape is poised for significant shifts, both in commercial and residential sectors. The previous year, 2024, was marked by gradual changes, particularly in the latter half, as the Federal Reserve began to lower interest rates. This long-anticipated move was welcomed by industry stakeholders, as the high cost of borrowing had stifled many transactions in 2023 and early 2024.

With a thawing market expected this year, capital that has been sitting on the sidelines is ready to be deployed for buying, selling, and developing properties. However, the extent of this thaw remains uncertain, influenced by various factors that will shape investment strategies and risk assessments in 2025.

The Office Market: A Mixed Bag of Optimism and Challenges

The office sector continues to be a focal point in commercial real estate (CRE). While leasing activity has been sluggish, there are signs of improvement in certain metropolitan areas, with some cities reporting positive absorption rates and declining vacancy levels towards the end of 2024. Major companies, including Amazon, are tightening their return-to-office policies, which could lead to increased demand for office space.

However, the office market is still grappling with significant challenges. Many older buildings lack the amenities that modern companies seek, leading to a decline in their value. Additionally, a substantial amount of office-related debt is becoming distressed, with delinquency rates among commercial mortgage-backed securities reaching an all-time high. This situation will continue to pose difficulties for office owners and lenders in 2025.

Housing Affordability: A Persistent Challenge

The national housing market remains under pressure, with affordability issues affecting buyers across the country. While inventory levels saw a slight increase in 2024, median home prices continued to rise, albeit at a slower pace. The surge in mortgage rates, which climbed from historic lows during the pandemic to over 7% in 2024, has further sidelined potential buyers.

Despite expectations for more listings and new construction in 2025, the ongoing affordability crisis will likely hinder many households from transitioning from renting to homeownership. The impact of rising prices and high mortgage rates will continue to be felt across various markets, including those once considered affordable.

Data Centers: Growth Amid Controversy

The demand for data centers has surged, driven by the increasing need for digital infrastructure and advancements in artificial intelligence. In 2024, the average vacancy rate for primary U.S. data center markets hit a record low, and this trend is expected to continue into 2025, with preleasing rates projected to rise significantly.

However, the rapid expansion of data centers is not without its challenges. These facilities require substantial power and water resources, raising concerns among environmental advocates and local communities. As the sector grows, balancing the benefits of technological advancement with environmental sustainability will be a critical issue.

A Time for Resetting and Rebalancing

The multifamily and industrial real estate sectors experienced unprecedented demand during the pandemic, but this has led to an oversupply of inventory. As we move into 2025, the market is expected to rebalance, with fewer new starts in both sectors. This adjustment will create opportunities for renters, as the influx of new units begins to stabilize the market.

Conversely, retail real estate has seen limited new construction, resulting in tight vacancy rates for prime spaces. The multifamily sector, while facing a glut, may see a reduction in concessions and rent cuts as the market absorbs new inventory.

Conclusion: Navigating the Future of Real Estate

As we look ahead to 2025, the real estate industry is at a crossroads, with both opportunities and challenges on the horizon. Stakeholders must remain vigilant and adaptable, leveraging insights and data to navigate this evolving landscape. Whether it's the office market's recovery, the ongoing housing affordability crisis, or the growth of data centers, the decisions made this year will shape the future of real estate for years to come. Stay informed and engaged as we embark on this new chapter in the real estate journey.