Real Estate Trends and the 2025 Outlook

Despite challenges in the commercial real estate sector in 2024, there is cause for optimism with potentially stabilizing inflation and rate cuts on the horizon. While the office sector’s future remains uncertain, CRE CLOs are set to resurge, along with NAV facilities for fund financing. Explore the key trends, matter highlights and considerations for the real estate sector heading into 2025.

Key Real Estate Trends and Developments 

• Commercial real estate in 2024 was a complex game of moving parts. While high interest rates, elevated inflation and geopolitical instability slowed deal activity in large parts of the market, many borrowers and investors found ways to navigate the distress and uncertainty and do business in a challenging environment.  
• The office sector remained sluggish amid high vacancy rates and growing finance costs. Meanwhile, industrial properties provided a stable investment option, with data centers among the most in-demand assets for PE sponsors and lenders looking to capitalize on surging demand for AI and other data-driven technologies. Bricks-and-mortar retail showed a remarkable ability to evolve, adapt and co-exist with ecommerce, with retail assets performing well in many investors' portfolios.
• While loan sizes were on the conservative side, lender appetite for CMBS loans increased, with a shift toward shorter fixed-rate conduit loans. Borrowers also flocked to single-asset, single-borrower (SASB) financing for large-scale industrial portfolios and trophy properties, with US$32 billion of SASB issuance reported in the first half of 2024 alone.

Outlook for Real Estate in 2025

Causes for optimism in the year ahead

Industry players predict that the commercial real estate sector will turn a corner in 2025, with owner and investor sentiment bolstered by stabilizing inflation and prospective rate cuts set to ease pressure on the cap rate. A recent Deloitte survey revealed that U.S. commercial real estate owners and investment companies foresee considerable opportunities in the industrial/manufacturing, digital economy, multifamily, logistics/warehousing, hotel and single-family asset classes.

Loan issuance: the return of the CRE CLO?

Following a period of muted origination, the CRE CLO is poised to make a comeback as the yield curve de-inverts and investors regain confidence in the market, reigniting issuance in floating rate transitional loans securitized in CRE CLOs.

The rise of NAV facilities as a fund financing option

Net asset value financing, or NAV facilities, have crossed over into mainstream finance for the enhance speed, leverage and cost certainty they provide in comparison to traditional financing models, particularly in public-to-private real estate deals. NAV financing is predicted to grow substantially as a segment as U.S., European and Asian banks look to move further into this space. 

Basel III Endgame back on the agenda

As the Basel III regulatory framework comes into effect in the EU from January 1, 2025, the UK and U.S. have delayed their implementation of the standards following calls from regulators and the industry to wind back provisions relating to minimum capital requirements for lenders. The UK's revised rules will come into effect from January 1, 2026. In the U.S., the Federal Reserve is hoping its reproposal ─ which puts forward more modest minimum capital requirements and reduces the risk weights for certain real estate exposures ─ will be approved as quickly as possible. 

Will the office sector face a reckoning in 2025?

The office sector has remained uncertain amid high vacancies and borrowing costs, but 2025 may shed some clarity on its future. With a backlog of short-term leases and lease extensions entered into during COVID-19 due for renewal, tenant demand will reveal whether this embattled sector shows signs of activity resuming, or if it faces a further period of contraction, particularly regarding secondary and tertiary markets and class B stock.

Sector Matter Highlights