Intelligent Investment
Capital Watch: The Case for Commercial Real Estate Amid Market Volatility
May 19, 2025 3 Minute Read
Recent equity and bond market volatility accompanied by the declining dollar following President Trump’s April 2 tariffs announcement was a highly unusual combination. This complex environment raised some important questions regarding asset allocations for investors, with real estate remaining an attractive option.
Amid market volatility, investors began to consider the denominator effect, whereby a sharp decline in one asset type can affect the relative weight of others in a portfolio and prompt investors to change allocations. While a recent rebound in the equity market has reduced denominator effect concerns, the case for commercial real estate investment remains strong.
Indeed, there are compelling investment opportunities in commercial real estate for investors able to withstand market volatility this year.
Figure 1: 12-Month S&P 500 Performance
Although commercial real estate values declined substantially as interest rates climbed, fundamentals remained robust and levels of new supply began to taper off. Most properties saw price reductions of 20% or more in recent years (closer to 40% for office assets). This resetting of asset values has made for some compelling investment opportunities.
To quantify the attractiveness of commercial real estate, we compared its price-to-earnings (P/E) ratio with that of equities, which reveals how expensive real estate is on a historical basis. Even when equity values declined in early April, commercial real estate values remained relatively attractive
The equity market has had a significant run, while real estate values readjusted to higher interest rates over the past three years. The combination of value and performance has made commercial real estate a particularly attractive option this year.
Figure 2: Equities P/E vs. Commercial Real Estate P/E
As noted in our last Capital Watch, we expect only modest cap rate compression because long-term interest rates won’t decline to previous low levels. Returns over the near term will likely be driven by net operating income. This will make due diligence even more important during this cycle, as asset types and locations perform differently.
The risk of material disruptions to trade with adverse macroeconomic effects remains uncomfortably high. However, the growing probability of U.S. trade deals, particularly with China, and the passage of a growth-enhancing tax bill around summer will create a different environment as the year goes on.
Investors should be ready to take advantage of strategic opportunities as the highest returns this cycle will be achieved during the coming quarters. Real estate is a long-term investment and fundamentals are expected to remain strong. This, combined with recent value resets, underpins our belief that 2025 remains an attractive year for commercial real estate investment.
Capital Markets
Contacts
Darin Mellott
Vice President, Head of U.S. Capital Markets Research, CBRE
Dennis Schoenmaker, Ph.D.
Executive Director & Principal Economist, CBRE Econometric Advisors
