Things are beginning to look up for investors in U.S. commercial real estate, according to the newly published 2025 Emerging Trends in Real Estate report issued by consulting firm PwC and the Urban Land Institute.
In this year’s survey of commercial real estate professionals, lenders and investors, 65% of respondents indicated they expect their firm’s profits to be “good” or “excellent” in 2025, a substantial increase from 41% who expressed that sentiment during last year’s survey. The share of respondents who expected “abysmal” or “poor” profits showed a sharp drop-off as well, according to the annual report. At the same time, these more optimistic expectations were for a return to historical averages rather than the double-digit returns of the 2010s, the two organizations warned.
The majority of survey respondents (55%) said acquisition activity remains too slow, while 58% indicated not enough refinancing is taking place. Most respondents (75%) also feel development activity continues to be slow.
However, industry insiders expressed relief about the downward direction of interest rates, even if the Fed’s 50-basis-point cut in September was too modest to bring about much change on its own. With the Fed signaling its intention to continue to lower its key interest rate, 80% of survey respondents said they expect lower commercial mortgage rates in 2025, which should help revive financing and investment sales activity.
In addition, slightly over 40% of respondents expect to see a decrease in cap rates in 2025, while 40% expect them to remain stable and less than 20% expect them to rise.
While the outlook for capital markets activity has improved, commercial real estate industry insiders now worry about property fundamentals faltering. The changes in tenant preferences brought about by the pandemic have played themselves out by this point. Still, the report noted that declining interest rates and a potentially slowing economy could signal slower income growth. As a result of these factors, while real estate professionals expect to see the beginning of a new expansion cycle in 2025, they anticipate this market recovery will be slow and gradual.
When it came to the most favored property types, industrial/distribution centers, single-family housing and multifamily were rated as having the best investment prospects in 2025, with ratings of 3.67, 3.60 and 3.59 on a scale of 1 to 5, where one equals “abysmal” and 5 equals “excellent.”
On the development front for 2025, single-family housing (3.60), industrial/distribution facilities (3.39) and multifamily housing (3.27) got the best ratings.
PwC and ULI researchers surveyed approximately 1,600 commercial real estate professionals and personally interviewed over 450 people for the report. Private property owners and developers represented 35.2% of respondents; professionals at real estate advisory and service firms and asset managers represented 20.1%; and construction and architecture professionals represented 7.7% of the survey sample. The remainder of the respondents were split between homebuilders/land developers, private equity real estate investors, lenders, investment managers and advisors and various other groups involved in the industry.
