Commercial real estate investors have much to look forward to in 2025, both from an operational standpoint and an investment transaction point of view, said John Chang, national director of research and advisory services at Marcus & Millichap.
Describing 2024 as a choppy year for CRE, Chang noted that consumer sentiment and small business optimism began to tick up in November and December.
“Those psychological dimensions can play a big role in people's decision-making, and can really influence commercial real estate,” said Chang.
Positive consumer sentiment tends to drive household formation and is a key indicator for apartment absorption trends, while small business optimism is a good indicator of both hiring trends and CRE transaction activity. Consumer sentiment bounced by 5% in the final two months of the year to its highest December reading since 2020 and the Small Business Optimism Index jumped 8% in November, also achieving its highest rating for that month since 2020, Chang said. Those strong gains suggest that 2025 will start out on a positive footing.
A post-election bump could be playing into these trends, although uncertainty around policies like tariffs and immigration as well as the direction of inflation remain.
“I suspect the first half of 2025 could deliver a bump in hiring, together with increased demand for apartment housing, office space and industrial space,” said Chang. “Retail space demand is already strong, but absorption will be limited by space availability.”
If strengthened sentiment translates to positive space demand across the various property types, commercial real estate investor activity could be boosted, he said. Elevated interest rates will likely continue to create headwinds for the market, but improving property fundamentals could bridge the spread between buyer and seller expectations.
The total number of CRE transactions last year was on par with 2015 at roughly 63,000 deals over $1 million dollars for the four main property types. Chang said he expects transaction velocity for 2025 to top that level, especially if confidence levels continue to trend upward.
“Elevated interest rates will continue to pose a challenge for investors, but if absorption demonstrates enough momentum to drive vacancy rates lower and spark increased rent growth, investors could begin to integrate stronger forecasts into their underwriting that would go a long way toward narrowing the bid-ask spread,” said Chang. “And if investors also bake in the positive longer term demographic trends and slowing pace of construction, they may see increased opportunity.”