CORFAC News

By 2024 CORFAC President David Boyd, CCIM, SIOR, Managing Principal, Boyd Commercial/CORFAC International, Houston

As 2025 starts, the commercial real estate investment outlook is one of growing clarity, continued stabilization, and increased opportunity. Interest rates are double 2019 rates, but they have declined from the recent peak and additional cuts are expected in 2025. Renewed demand for new projects comes from equity investors who have picked back up their pencils. Post-election we no longer face the threat of increased capital gains taxes and may see tax cuts in other areas that lead to business expansion. These factors will drive increased commercial real estate deal flow in the year ahead.

Over the past year most CRE sectors have experienced headwinds to varying degrees. Industrial vacancies are up nationally, and effective rents are flat or down, albeit from all-time highs in 2022 and 2023. Deliveries of new speculative ecommerce and logistics space outpaced the demand across the country, and some major West Coast markets experienced significant negative absorption as importers and distributors normalized their inventories to post-pandemic levels. We should see industrial vacancy peak early in 2025 then tenant demand will likely recover. The potential for new tariffs and an impending trade war may have mixed impacts on logistics, but it should drive some new industrial demand as importers and distributors stockpile inventory. 

Nationally, the office market vacancy rate increased last year and will likely continue to do so throughout 2025. Hybrid work has reduced the size requirements of many office tenants. Expect distress in older buildings as owners struggle to cover their debt service on reduced cash flows or can’t afford the cost of upgrades and renovations to lure new tenants. A bright spot of activity will be amenity-rich new developments and live/work/play environments that help attract employees.
Luxury lifestyle-oriented offices will command premium rental rates as many major occupiers flock to quality. This will result in opportunities for investors to repurpose older properties into residential or mixed-use projects.

Despite an increase in store closures, retail bankruptcies, and ecommerce competition, retail remained surprisingly strong through 2024 and will continue the  trend in 2025. Vacancy rates nationally remain under 5%. The high price and lack of well-located land coupled with today’s inflated construction costs make it difficult to underwrite new construction. This will keep vacancy rates low, bolster rents in primary trade areas, and provide stability to shopping centers
located in infill areas. Traditional malls will continue to decline with some near population centers being demolished and replaced with last-mile industrial.

Things to watch in 2025 include a high demand for new data centers to process the AI revolution. They are difficult to build because of the large power and water requirements, but have grown into a major asset class. The strong multifamily market will be further driven by a single-family home affordability crisis occurring in many major markets. Technology innovations will have significant impacts on many aspects of commercial property ownership and operations. Smart
buildings will prove more energy efficient and allow for better tenant management. Data analytics and AI will help investors and building managers make better decisions including predictive deal making and optimized operations resulting in more cash flow to the bottom line.

Originally published in Wealth Management's 2025 Market Outlook.