T
he 27th annual ULI Real Estate Economic Forecast predicts a positive but uncertain outlook for the commercial real estate industry in 2025. GDP growth is expected to decline to 1.3 percent, a 150-basis-point drop from 2024. This adjustment is attributed to near-term volatility and slower growth due to new tariff policy, which has created uncertainty across various sectors.

    Despite optimism at the start of 2025, the industry is preparing for a period of volatility before seeing improvement in 2026 and 2027. The consensus forecast calls for GDP growth to rebound in 2026 and 2027, driven by demographic shifts and innovation. However, job growth is expected to slow, with a decline from 2 million in 2024 to nearly half that amount in 2025 and 2026 before increasing to 1.45 million in 2027.

    Transaction volumes are also expected to recover slowly, rising from $437 billion in 2024 to $469 billion in 2025 and $525 billion in 2026, with a bigger move to $600 billion ahead for 2027. The scarcity of deals on the market is contributing to tight cap rates, making it challenging for investors to determine fair values.

    Senior housing is expected to lead the sector outlook, with annual rent growth reaching 4.5 percent and maintaining a steady level of 4.3 percent in 2026 and 2027. Retail and single-family rentals are also forecast to have solid three-year returns and rent growth, driven by low levels of new construction.

    However, office space remains challenged, particularly commodity office space, with a forecast return of -3.4 percent this year potentially being optimistic. The high cost of operating an office asset makes it economically challenging to justify investment unless it's super-core or super-high end.

    Navigating near-term uncertainty requires a focus on durability of cash flows and sticking to core strategies. Clarion Partners has approached the uncertainty by focusing on areas where it has conviction, such as the housing shortage, demographic shifts, and innovation. By identifying thematic drivers that will work regardless of the economic cycle, the company aims to navigate through uncertainty and perform well in the long term.