Chapter 2
Capital Markets
U.S. Real Estate Market Outlook 2025
5 Minute Read
Slow But Sure Investment Recovery
CBRE expects a continued recovery for investment sales in 2025; however, investors and lenders will face several headwinds. The 10-year Treasury yield will remain above 4% as markets react to a persistently large budget deficit, stimulative fiscal policy and the potential for higher inflation. Nevertheless, strong economic growth driving positive fundamentals will support the recovery in investment activity, with volume up by as much as 10% next year.
Investors will focus on industrial and multifamily assets. Office properties will remain challenged, with investors still very discerning. Assuming minimal disruptions from tariffs, retail will continue to attract investors with its strong fundamentals and we expect some portfolio sales will ensure a robust year for this property type.
Figure 4: Commercial Real Estate Investment Volume
Election Impact
The second Trump presidency presents both opportunities and risks for commercial real estate. The industrial and retail sectors will be particularly affected by trade policy and shifting consumer spending patterns. Fiscal policy will also have some bearing on the cost of capital.
Prospects for historically high budget deficits could keep long-term interest rates relatively high, weighing on the budding recovery in investment activity. On the other hand, higher interest rates will bolster multifamily fundamentals as homeownership affordability challenges support rental demand. Investors will also have greater certainty around capital gains and other tax policy, which we expect will remain favorable for the industry and investors.
The industrial and retail sectors will be particularly affected by trade policy and shifting consumer spending patterns. The fiscal policy mix will also have some bearing on the cost of capital.
Cap Rates
Cap rates will slightly compress in 2025. While Treasury yields and rents are the biggest drivers of cap rates, other significant factors include the risk premium and GDP growth. CBRE forecasts that cap rates will slowly fall and stabilize at higher levels than in the last cycle due to interest rates remaining higher than they were during the 2010s. This is driven by outsized budget deficits and continued economic growth, among other factors.
From their peak in 2024 to the end of 2025, industrial cap rates will fall by 30 basis points (bps), retail by 24 bps, multifamily by 17 bps and office by 7 bps. This forecast is subject to changes in borrowing rates, which will impact activity and pricing. Investors should consider broader macroeconomic drivers that influence Fed policy to understand cap rate movements.
Although macro factors determine the direction of cap rates, the extent of those changes can be influenced by the relative strength of each market and asset. As such, market and individual asset selection will be even more important considerations for investors during the current cycle's early phase.
Figure 5: Factors That Influence Cap Rates
Risks & Opportunities
Risks
Geopolitical risks, potential fiscal or monetary policy errors and persistent inflation—potentially exacerbated by trade and immigration policy changes—could impact the nascent capital markets recovery.
Continued distress in the office sector and, to a lesser extent, the multifamily sector is likely. As a result, banks—particularly community and regional banks—will manage their exposure to commercial real estate amid continued regulatory scrutiny. Construction loans will remain relatively difficult to obtain from banks. There also is uncertainty around the reproposed Basel III rules that could compound issues for banks that lend to commercial real estate, impacting liquidity in the sector. However, following the election, we anticipate any implementation to be less disruptive than previously feared.
Opportunities
CBRE views the current investment environment differently from the one leading up to the pandemic. Structural changes impacting demand for various property types have rendered some assets less competitive in the marketplace (e.g., non-prime office and less-functional industrial properties).
Nevertheless, we continue to see a number of opportunities. The pricing reset across all sectors and continued distress in the office and multifamily sectors will present unique prospects for investors over the coming quarters. This will be particularly apparent for well-located Class A office assets that can expect demand spillover from prime properties.
Evolving supply chains and a relatively healthy consumer will continue to present opportunities in the industrial sector, particularly as trade policy impacts the flow of goods entering and leaving the country. For the multifamily sector, reduced levels of new supply and higher mortgage rates will result in healthy demand and better fundamentals. And investment opportunities will abound in the retail sector amid continued consumer strength and low levels of new supply, although the imposition of tariffs might weaken investor sentiment. We also expect more interest in alternatives, especially data centers.
Lower interest rates amid global economic growth, particularly that of the U.S., will stimulate foreign capital inflows. However, the strength of the U.S. dollar will be a headwind for foreign investors.
Figure 6: Commercial Real Estate Investor Sentiment Index
Trends to Watch
- Pricing will rise for all property types, even office.
- Investors will begin to cautiously move out on the risk spectrum amid strong competition for industrial and multifamily assets.
- Capital will be selective with regard to markets, property types and assets amid an evolving investment landscape.
- Debt capital will remain available but the composition of lenders will shift amid bank losses.
- Major policy changes, including tax, trade, immigration and federal spending, will have varying impacts on commercial real estate and the overall investment environment.
- Bond market volatility will continue into the medium term.
Contacts
Darin Mellott
Vice President, Head of U.S. Capital Markets Research, CBRE
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