Buyers and sellers of commercial real estate continue to have a tough time agreeing on appropriate asset pricing as the interest rate environment remains dynamic and there is a lack of sufficient transaction volume to safely assume prices have bottomed out.

For the past two years, many sellers have been reluctant to accept that higher interest rates mean their properties’ previous valuations can no longer be supported. At the same time, many buyers feel that, with refinancing more expensive and harder to secure than it was in the 2010s and early 2020s and some economic indicators showing a potential slowdown ahead, they should be seeing bigger discounts to justify the risk they may be taking on.

Today, prices in most commercial real estate sectors are showing improvement. However, the bid/ask gap remains stubborn enough to remain an issue in 2025.

While the pandemic is now in the rearview window, office building owners continue to feel the long-term effects of the lifestyle shifts it created. Many people are now working from offices, at least part of the time, but demand for office space is still nowhere where it was pre-COVID.

Nationwide office vacancies will likely reach 19.7% by the end of the year, according to CBRE Econometric Advisors. For office owners, especially in big urban centers like New York City, Chicago, Philadelphia and San Francisco, that means lower NOIs and property valuations, as well as potential challenges in refinancing their building loans.

Some of the proposed solutions over the past few years have included converting offices into apartment buildings to combat housing shortages. However, not all office buildings are well-suited for such conversions. In the meantime, the office sector continues to remain in limbo as both owners and lenders try to figure out the best way forward.

Extreme weather events and changing government regulations are making sustainability even more of a priority for the commercial real estate industry. In 2023, there were 28 natural disasters in the U.S. costing more than $1 billion in damages, according to the U.S. National Oceanic and Atmospheric Association. Those figures were unprecedented.

For real estate owners this means protecting their properties from weather-related events is more important than ever, especially when combined with greater emphasis on sustainable investment and sustainable finance. At the same time, countries and municipalities around the world are adopting more regulations dictating standards surrounding energy efficiency, climate reporting and greenhouse gas emissions. All of this is putting greater pressure on landlords to make their buildings more sustainable.

AI has been on everyone’s mind over the past several years, and the real estate industry is no exception. For commercial real estate professionals to be able to use AI effectively, however, they need to use accurate data and factor in the lag time inherent in estimating current real estate deal volumes and valuations. Property location is also an important consideration when figuring out a real estate asset’s value, and current AI algorithms don’t necessarily understand the difference between an office building on Fifth Avenue in New York City and one in a suburb of Omaha, Neb., without human intervention. The real estate industry will need to work together to train AI algorithms to provide accurate, timely and granular data.

Housing affordability has been an issue for the U.S. for quite some time now, and it’s only getting worse. Government agency Fannie Mae estimates that between 2009 and 2023, average multifamily rents have risen by 45%. The American Community Survey for 2022 found that almost 54% of U.S. renters are cost-burdened and spending over 30% of their household income on rent and utilities.

The situation has been due to a combination of factors—a delay in new apartment construction in the years immediately following the Great Recession, the concentration of new projects in only a handful of the nation’s largest metropolitan areas and the pullback in multifamily building since the pandemic. At the same time, the real estate industry expects demand to only grow as the age cohort of those between 20- and 34-year-olds looks to rent more apartments, which will only exacerbate the existing demand/supply imbalance.

Inflation had already been putting pressure on property insurance costs, but the past few years also brought an almost unprecedented number of natural disasters that are raising insurance premiums by double and triple digits. In 2023, global economic losses from natural disasters reached a record-breaking $380 billion. Of those, only 31% were covered by insurance, according to the 2024 Climate & Catastrophe Insight Report from Aon.

This year wasn’t much better, with Hurricanes Helene and Milton causing widespread damage in the Southeastern U.S. In some states, government regulations put even more pressure on landlords to pay up to plaintiffs on “habitability lawsuits.” Property insurance costs can take a big bite out of NOIs, so this is a major issue. Owners might need to develop better strategies to work together with insurance brokers to lower risks and secure better coverage.

The geopolitical environment feels more unstable than it’s been in decades, with two major wars raging in Europe and the Middle East. In an interconnected world, such instability tends to have ripple effects on everything from inflation and supply chain dynamics to immigration and monetary policies. In real estate, it also impacts construction costs and expectations for risk-adjusted returns.

In a time of uncertainty, the U.S. is often seen as a port in a storm by foreign investors looking for a safe place to park their money. That should have a positive impact on investment sales volumes. However, those investors will also be pricing in higher interest rates and higher levels of overall risk on their offers, which means that cap rates will likely edge higher.

For the past several years, lenders have been avoiding dealing with $1.8 trillion in commercial real estate loans that are scheduled to come to maturity before the end of 2026. Instead, they’ve relied on the “pretend and extend” strategy to push upcoming maturity dates further out, hoping that both capital markets conditions and property performance are going to improve in the meantime.

However, lenders can’t keep avoiding dealing with the issue forever and might end up having to handle a higher volume of loan resolutions than they anticipated. It remains unclear at this point how messy the process will get—a lot will depend on the direction of interest rates and how orderly the workout process will be.

After almost a year of delaying the interest rate cuts it signaled were coming, the Federal Reserve finally announced a 50-basis-point cut in September and a 25-basis-point one this month. Regardless of whether it will continue its rate-cutting policy, however, the era of super-cheap debt has clearly come to an end. Real estate financing costs have gone from under 4% several years ago to over 7% today. Some buyers have been attracted by the higher cap rates. But it will likely take another two years before market participants feel more certain about the direction of interest rates and acquisition activity returns to a more normal place, The Counselors of Real Estate predicts.

While the U.S. election has been decided, elections are upcoming in 70 countries over the next year, including in Mexico, Taiwan, the E.U. and South Africa. Together with whatever policies the new Trump administration and a (likely) Republican House and Senate will implement, the outcomes of those elections will impact global trade, climate, international relations, global conflicts, macroeconomics and interest rates.

This will be happening in one of the most challenging geopolitical environments in decades. All of these factors will affect the performance of the commercial real estate sector. For example, when lenders finally start dealing with real estate debt maturities head-on, the government’s enforcement (or lack of enforcement) of banking regulations will play a role in how quickly and effectively that debt will be unwound.