F
ollowing years of inflation, muted growth, and uncertainty, the commercial real estate market may be poised for a rebound. Victor Calanog, global head of research and strategy at Manulife Investment Management, is optimistic about the industry's future: "The landing will be relatively soft, which should sustain positive momentum for economic activity." This bodes well for key drivers such as leasing, rents, and occupancies.
Overall, the outlook for 2025 commercial real estate is positive. The industrial sector remains strong, driven by e-commerce and logistics demands. Industrial vacancy rates decreased to 6.7 percent in the third quarter of 2024, a decline from previous years. Multifamily and retail continue to perform well, although they have vulnerabilities.
Office markets may be normalizing after multiple years of volatility. The office sector's vacancy rate held steady at 20.1 percent in the third quarter, with some suburban markets showing signs of cap rate flatness or declines. Retail continues to thrive, driven by grocery-anchored neighborhood shopping centers and high-end retail shopping centers.
Multifamily demand remains strong, but overbuilding in certain markets has led to concessions for apartment property managers. To address these issues, they can offer units to renters with different income levels. However, concerns such as natural disasters, cybersecurity risks, and interest rate uncertainty will factor into investment decisions and new innovations throughout 2025.
To mitigate the impact of natural disasters, commercial real estate should invest in deep-energy retrofits and large-scale engineering projects. Cybersecurity threats are also a concern, with 80 percent of organizations reporting payments fraud in 2023. To protect themselves, companies can maintain up-to-date systems, invest in cybersecurity, and practice good cyber hygiene.
Interest rate uncertainty remains top of mind, despite the Federal Reserve's interest rate cuts in 2024. The timing and pace of further rate decreases will depend on future economic data and policy decisions. Despite these challenges, positive momentum across all sectors will be felt in commercial real estate.
The demand for affordable housing continues to outweigh supply, with innovative approaches being taken to address this issue. J.P. Morgan's Agency Lending and Workforce Housing Solutions groups offer unique financing options, while modular construction may also increase affordable housing supply. Strong public-private collaboration has a key role to play in development, particularly around affordable housing.
The 2025 commercial real estate outlook is largely optimistic, with robust performance in the industrial sector and steady retail growth. While concerns persist, opportunities in affordable housing and public-private collaboration offer promise for growth and innovation.
