COLUMNS
Commercial Real Estate in 2025: Reasons for Optimism and Causes for Concern The commercial real estate (CRE) industry today contends with inflation, higher interest rates and refinancing pressure, all of which are tempered by improving market dynamics, steadying demand and regional incentive programs. The following high-level overview outlines several areas that will, for better or worse, shape the sector’s performance over the following months.
Ed Hanley
Managing Director Cbiz 53 State St., 17th Floor Boston, MA 02109 ed.hanley@cbiz.com (415)869.5577
Financing A record number of CRE loans are due to mature between 2025 and 2027, inviting refinancing pressure. Meanwhile, interest rates were cut three times during 2024, with the Fed signaling that they will likely remain stable barring major economic developments. The 10-year Treasury yield, an influential driver of CRE mortgage rates, is expected to range from 3.8% to 6% through 2025. Industry analysts expect deal flow over the year ahead to follow the relatively anemic trend of activity established over 2024, with the caveat that rent growth could accelerate deal activity in the second half of the year. Tax Policy The stated desire of the current administration is to extend the significant tax breaks first introduced by the Tax Cuts and Jobs Act (TCJA), currently scheduled to sunset in 2026. Advisors, investors and property owners are keeping a close eye on the following provisions: •
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Bonus Depreciation: Bipartisan Congressional support suggests 100% bonus depreciation could be restored and incentivize property investment, improvement and development. Qualified Business Income Deduction (QBI): The expense associated with extending the 20% QBI deduction means it may be extended in a modified form, but extension efforts have received support. SALT Deduction Cap: The expiration of the $10,000 SALT deduction cap could benefit CRE investors in high-tax states, but the costs at the federal level are significant and its extension remains uncertain with discussions ongoing.
Market Dynamics Following nine consecutive quarters of rising vacancies, office vacancy rates finally stabilized in 2024 and are expected to peak in 2025. Class A buildings enjoy the highest rates of occupancy, while lowerquality buildings are expected to continue to suffer high vacancy rates. However, the low rate of new office
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construction buoys hopes for the long-term prospects of these properties. In some markets, including major metro areas like New York, Chicago and Washington, D.C., tax breaks are available to incentivize conversions of office property into residential and industrial property. Industry analysts expect particularly strong demand for senior housing and data centers based on economic and demographic data. Construction Economics The industry at large continues to struggle with persistent labor concerns. According to constructconnect.com, 90% of contractors have reported difficulties filling hourly and salaried positions alike. In addition, as I write this, various tariffs are due to take effect within the next few weeks and are expected to increase the costs of essential materials and could encourage construction companies to reconfigure their supply chains. The industry has seen strong demand across several sectors, notably warehousing and hotels, while 2024 saw a record number of new multifamily units constructed with an estimated two million more to be built by 2028. Mitigating Risk Insurance premiums have risen alongside inflation and construction costs. Claims related to catastrophic weather events are a major driver of premium costs, with 24 weather-related disasters causing losses of more than $1 billion in the first 10 months of 2024. Risk assessments can help identify vulnerabilities, evaluate exposure and enhance risk management strategies across property portfolios. Additionally, sustainability and resilience initiatives can help control the costs associated with physical, regulatory and economic vulnerabilities. Energy efficiency, building standards and green building methods are incentivized by many municipalities, while complex compliance requirements further encourage the refinement of industry practices. Conclusion The year ahead offers a mixed bag of indicators, with persistent challenges and plenty of emergent opportunities alike. Investors and owners can best prepare for success in 2025 by evaluating market opportunities, enhancing tax and financial strategies and reinforcing risk management efforts.
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