Real estate: outlook for 2025

Key trends in 2025’s real estate outlook

• Lower interest rates will ease the pressure on real estate investors in 2025, but the rebound in real estate deal activity will be uneven 
• The sector continues to grapple with secular shifts in the market following pandemic. Opportunities will arise but risk lingers 
• Data centers, logistics and the living sector present the most compelling near-term investments, but there is value to be found in other verticals 
• Real estate players still have to manage a large wall of debt maturities. This will be a challenge, even as interest rates recede

Real estate is in a much stronger position than it was 12 months ago, but while the asset class is set to rally in 2025, the road to recovery will be uneven and complex. 

The good news for the sector is that as near-term interest rates have cooled and stabilized, so have real estate valuations, with asset manager abrdn noting that the pricing corrections that weighed on the sector through the rising interest rate cycle appear to have run their course.  

As valuations stabilize, returns are set to improve, with abrdn forecasting annualized global all-property total returns of close to 7 percent for the next three and five-year periods. 

For deep dives into key trends driving the 2025 real estate outlook, read on.

Navigating real estate’s recovery in 2025

Navigating the real estate recovery, however, will not be straightforward, even as the macro-economic fundamentals improve. 

The sector is still in the midst of a period of reconfiguration following pandemic lockdowns, which has driven large, secular shifts in usage patterns.  

Remote working and AI, for example, have had a profound impact on office real estate assets, which continue to encounter headwinds even as large corporates lean on employees to return to the office. Retail is another real estate sub-sector that has been challenged following the pandemic, and then the squeeze on consumer spending as inflations and interest rates climbed. In the two-years following the first pandemic lockdowns, retail vacancy rates climbed to new record levels in some jurisdictions as rents saw drops of more than 10 percent. 

Other real estate verticals, however, have thrived. Private markets investment platform Partners Group notes that living and logistics assets have benefitted from long-term secular growth drivers and constrained supply, while the data center space has gone from strength to strength.  

In the US alone, the colocation data center market has doubled in size during the last four years, defying the rising rate cycle to continue meeting surging demand for data and digital infrastructure to power AI and digitalization. 

The rub for real estate investors as they move into 2025 is that real estate remains bifurcated and complicated market. There will be a recovery in pricing and deal activity, but there are still banana skins that investors will have to avoid. 

Balance sheet housekeeping is still a key real estate focus 

In addition to trying to read the real estate rune sticks, investor bandwidth will also continue to be absorbed by existing portfolios, for which large amounts of refinancing are imminent in the next four years. 

According to Trepp data analyzed by asset manager Franklin Templeton around US$1.2 trillion of commercial real estate debt will mature in 2024 and 2025, with a further US$1.7 trillion falling due between 2026 and 2028. 

Falling interest rates and lower debt costs will ease refinancing pressure to a degree, as will stabilizing pricing, which will support more favorable loan-to-value ratios.  

However, even though interest rates have eased in 2024 and are expected to continue moving in favor of borrowers in 2025, base rates remain materially higher than they have been for years and will test capital structures put in place prior to the rising interest rate cycle. 

Even as the wider real estate market shows green shots, there will simultaneously be pockets of distress in the sector in 2025 as borrowers battle to service debt costs while base rates remain elevated relative to the prior cycle. 

Amid a 2025 real estate outlook, risk remains – but opportunity beckons 

Against a background of looming maturities and market bifurcations, investors are likely to continue leaning into the most robust and fastest growing real estate segments, with the red-hot data center space leading the charge. 

There will, however, be a window of opportunity for savvy investors with solid operational track records as well as sector and regional know-how to lean into less popular real estate segments and invest in high quality assets attractive valuations. 

Retail real estate, for example, which has been struggling and out-of-fashion for years, appears to be turning a corner as global retail sales recover.  

JLL notes that in key jurisdictions such as the US, vacancy rates in high-quality retail locations are approaching record lows, with tenants jumping at opportunities to lease new space as it becomes available. Not all locations will see an uplift, but prime space is well placed to generate attractive returns. 

The office segment, which looks challenging overall, also presents opportunity for investors and developers that can identify sites in the right location and price risk effectively. According to JLL, office vacancy rates are forecast to peak in 2025 with availability for high demand locations falling. The narrative around offices may still be broadly negative, but early movers who pick the right assets will see the potential in 2025 vintage deals. 

Real estate risk will continue to linger in 2025 – but so will new opportunity.