Big Ideas in Commercial Real Estate

February 2025 Market Intelligence

Renewed Optimism as CRE Market Shows Signs of Life

Investors are increasingly upbeat as 2025 kicks off, with more capital flowing into deals and improving sentiment across commercial real estate. After a prolonged slump, transaction volumes and financing activity are picking up, signaling that many market participants expect a turning point.

Actionable Insight

Leverage this momentum but stay focused on high-performing sectors to ride the recovery.

Supporting Data

Confidence Rebounds: 88% of global CRE executives expect revenues to rise in 2025, a sharp turnaround from the past two years of pessimism.

Market Ready for Deals: Over $100B in CMBS issuance last year has primed investors to embrace new opportunities in 2025, reflecting growing risk appetite.

High Interest Rates and Refinancing Crunch Continue to Bite

Despite a brighter outlook, financing costs remain a thorn in the side. The Fed's recent pause (after late-2024 rate cuts) leaves borrowing rates elevated, squeezing deal yields and complicating refinancings. A massive wave of loan maturities is looming, forcing lenders and borrowers into tough choices.

Actionable Insight

Plan for higher capital costs — lock in rates where possible, explore creative financing, and shore up cash flows ahead of debt maturities.

Supporting Data

Rates Still High: The Fed held its policy rate at ~4.25–4.50% in January, with officials in 'no rush' to cut further – keeping CRE debt expensive (30-year mortgage ~7.1%).

Refinancing 'Wall': Nearly $1.2 trillion in commercial mortgages comes due in 2024–25. High rates mean many loans face renewal stress, especially in office, as few lenders want to refinance underwater properties.

Office Sector Struggles, But Hints of Stabilization Emerge

The office market remains the problem child of CRE, with vacancies at record highs and valuations sharply down. Distress is widespread – however, there are early signs the worst may be peaking. Some hard-hit office loans are being resolved or restructured, slightly easing default metrics.

Actionable Insight

Exercise caution with office assets. Focus on quality locations or conversion opportunities, and be prepared to negotiate with lenders as the sector finds its footing.

Supporting Data

Ongoing Distress: Office values have plunged ~40% from their peak and delinquencies could hit 11% in 2025, per Fitch, amid a 'secular decline' in demand (availability ~30% in many big markets).

Slight Relief in Defaults: In January, the office CMBS delinquency rate dipped to 10.23% (down 78 bps) after hitting an all-time high at 2024's end – thanks to a few large loan workouts.

City Crunch Example: San Francisco's office vacancy is at a staggering 37%, fueling major loan defaults (e.g. a $350M SF tower went into default and is up for workout). The pain is real, though some markets (and suburban offices) are stabilizing.

Industrial and Multifamily Lead, Retail Proves Resilient

Not all CRE is equal – industrial and multifamily assets continue to shine, and even retail is holding steady with adaptive strategies. Logistics warehouses and apartments benefit from strong demand drivers, while necessity-based retail (like grocery-anchored centers) and experiential retail are performing well.

Actionable Insight

Pivot toward sectors with solid fundamentals. Industrial and apartment properties remain attractive for acquisitions and development, and well-located retail can offer steady income as the economy improves.

Supporting Data

Industrial Strength: U.S. industrial vacancy fell to 6.7% in late 2024, the first decline since 2022, as e-commerce and supply-chain needs keep warehouses in high demand.

Multifamily Momentum: Multifamily remains the 'loan du jour' for lenders – demand is strong enough that rents are projected to keep rising (~1.5% next quarter) despite a full pipeline of new units.

Steady Retail: Brick-and-mortar retail is far from dead – grocery-anchored centers and luxury malls are driving retail's solid performance. More foot traffic (helped by back-to-office trends) means well-located retail properties are seeing improved sales and leasing interest.

Creative Financing and Investment Strategies Gain Traction

With traditional lending tighter and high rates eating into returns, CRE players are getting creative. We're seeing more sale-leaseback deals, loan restructurings, and new equity capital targeting distressed or undervalued assets. Even big corporations and foreign investors are capitalizing on these conditions.

Actionable Insight

Think outside the box – consider unlocking equity via sale-leasebacks, hunt for bargains with patient capital, and work with lenders on proactive loan workouts to navigate the current financial landscape.

Supporting Data

Monetizing Assets: AT&T's $850M sale-leaseback of 74 properties shows how companies are raising cash from real estate without giving up operations – a blueprint others may follow to bolster liquidity.

Fresh Capital Coming In: Opportunistic investors are on the move. Example: a major Korean fund went on a $1.6B U.S. real estate buying spree, signaling global confidence in long-term value.

Extend and Pretend Tactics: Banks and borrowers are increasingly restructuring loans to avoid defaults, but regulators warn this can mask risk. Re-defaults on modified CRE loans jumped 90% year-on-year to $5.5B, reminding everyone that kicking the can is only a temporary fix.

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