Impact of Economic Conditions on Commercial Real Estate

A slight contraction of U.S. GDP in Q1 2025 was largely attributable to a surge in imports prior to the imposition of tariffs, as well as decreased government spending. However, private consumption and investment remained strong, even as recession fears grew. The classic definition of a recession is negative economic growth for two consecutive quarters. CBRE does not expect this to occur, and forecasts GDP growth averaging 1.3% this year. Inflation could surge depending on how high tariffs go, how long they are in place and how they impact product prices.

The U.S. added just over 520,000 jobs in the first four months of 2025. Unemployment crept up 10 basis points to a still low 4.2%. The Federal Reserve will be challenged to balance a softening labor market with continued price increases. Nevertheless, CBRE expects the Fed to make three 25-basis-point cuts to the federal funds rate this year.

The conclusion of major trade deals, along with significant fiscal stimulus from the tax bill that is working its way through Congress, would bolster both consumer spending and business investment. However, failure to reach many trade agreements or to enact pro-growth tax legislation would dampen consumer spending and business investment, as well as push up both bond rates and inflation.

Figure 1: MOVE Index

Figure 2: VIX Volatility Index

We expect the 10-year Treasury yield to remain higher for longer in the low-to-mid-4% range in 2025; however, continued volatility could periodically push the yield higher or lower. Amid uncertainty over government policy, CEO confidence and consumer confidence fell to their lowest levels since 2012 and 2014, respectively. This uncertainty will weigh on both leasing and, to some extent, sales activity over the near term. While real estate fundamentals are not subject to the same level of volatility as equity markets, more cautious sentiment could cause both businesses and consumers to delay decision-making.

Industrial leasing volume was relatively strong in Q1 2025 at just over 189 million sq. ft., largely driven by third-party logistics (3PL) providers. See CBRE’s Q1 Industrial Figures report for details.

As market conditions become more tenant favorable, landlords are beginning renewal negotiations roughly 24 months prior to lease expiration. This is a big shift from the pandemic era, when landlords delayed renewal negotiations for as long as possible to secure the highest rents.

Industrial market conditions will see direct impacts from trade policy, as leasing demand significantly depends on the amount of goods flowing into the country. As U.S. companies begin to depend more on trade with Mexico and Canada, CBRE expects markets along the I-35 corridor to benefit (e.g., Dallas and Kansas City).

Less consumer consumption due to any tariff-induced inflation, along with a softening labor market, could further slow industrial leasing activity. Impacts would be felt most acutely among large (500,000 sq. ft. or more) and small (100,000 sq. ft. or less) users. Given the shift in sentiment and trade policy, CBRE expects a 5% to 10% reduction in industrial leasing volume this year.

Office leasing volume increased by 18% quarter-over-quarter in Q1 2025 to just over 54 million sq. ft. The recovery that began in New York’s prime office market has expanded, with 32 of the 40 largest U.S. office markets recording improved net absorption year-over-year in Q1. See CBRE’s Q1 Office Figures report for details.

Leasing activity in the second half of the year depends on how trade policy and macroeconomic uncertainty impact business dynamics. Some occupiers have already put active deals on hold and we expect that more will sign lease renewals rather than expansions and relocations, saving on both moving and space buildout costs. However, those occupiers whose business is less sensitive to trade policy will likely continue moving forward on deals.

CBRE forecasts a 4% increase in office leasing volume this year. Most office markets have been recovering from the pandemic downturn as seen in Figure 3. Occupiers would be well advised to consummate leasing transactions as market conditions become more landlord favorable.

Figure 3: Office Net Absorption for 40 Largest U.S. Markets, Q1 2025 vs. Q1 2024

Retail availability ticked up 10 basis points in Q1 to 4.8%, as absorption turned negative for the first time since Q3 2020. Discount, clothing and big-box stores will likely be most impacted by supply chain disruptions. As consumers retrench and retailers see margins compress (potentially exacerbated by higher tariffs), we expect leasing to slow. However, the retail availability rate remains very low with little new supply coming online. While this will support some deal activity as companies make strategic moves, retail will be particularly impacted by the evolving macroeconomic situation.

The construction pipeline continues to contract across all property types. CBRE estimates that construction costs have increased by 35% since 2020, which, along with higher financing costs, has catalyzed the decline in speculative development.

Retail completions totaling 4.5 million sq. ft. in Q1 2025 were the lowest for the sector in more than a decade. Multifamily delivered just over 70,000 units in Q1, while industrial completions fell to their lowest quarterly level since 2017 at just over 220 million sq. ft. The office sector had just over 22 million sq. ft. under construction in Q1, 82% below the amount in Q1 2020.

Commercial real estate investment volume increased by 14% year-over-year in Q1 to $88 billion. The capital markets outlook remains highly dependent on the outcome of trade negotiations and how the bond market performs. Spreads have widened, but we expect the 10-year Treasury yield to remain in the low-to-mid-4% range in 2025. This should allow investment volume to increase by up to 8% this year.

The bond market’s reaction to increased volatility (selloffs of U.S. Treasurys due to concerns over the size and long-term trajectory of the U.S. budget deficit) poses some downside risk to our outlook. We still view capital as very motivated to transact, even as general sentiment turns more cautious. Investors continue to prefer multifamily and industrial properties, while retail and office assets gained popularity. Alternative sectors have drawn less interest as investors took advantage of pricing adjustments in the primary property types.

Deals are still proceeding, some with adjustments. Certain sectors such as multifamily are still seeing competitive bidding. The biggest challenge has been higher long-term interest rates, though credit is still flowing.

Debt markets were generally very healthy throughout Q1, with all lender types active. Nevertheless, the situation remains very fluid.

Even with challenges, we believe compelling opportunities still exist in certain sectors: non-prime Class A office buildings in coastal gateway markets; industrial assets along the I-35 corridor that capitalize on trade shifts; well-anchored retail centers; Midwest multifamily markets, and data centers, which benefit from structural demand drivers. Opportunities also exist for core capital in long WALE assets and sale/leasebacks, as well as assets with motivated sellers, including those facing debt maturity issues. Public-to-private holdings will appeal to opportunistic capital.