High interest rates dominate investment outlook
The path ahead for commercial real estate investment in the US in 2025 is paved with uncertainty. After a full percentage point interest rate cut over the course of three consecutive Federal Reserve announcements in 2024, officials are expected to ease the pace this year in the face of potentially higher inflation imposed by the threat of widespread tariffs and other policy changes.
As such, we can expect higher interest rates for longer, meaning borrowing costs for investors will stay high. At the same time, this scenario keeps the appetite for more distressed and opportunistic plays in the market, creating a small uptick in investment activity.
The office sector continues to experience high levels of oversupply, although much of the excess is slowly being reduced, either through leasing activity or conversions. Some markets and regions are faring better than others. Class A spaces that are well located and well enough equipped to “earn the commute” of employees are in short supply and high demand. Additionally, there are billions of dollars of debt maturing in the near term – at a time when office valuations remain sharply discounted.
Distressed office and industrial opportunities
An increasing number of US landlords have found themselves unable to agree to new terms with lenders. This trend is expected to continue throughout 2025, particularly where cash flows associated with underutilised lower-quality and commodity assets remain an issue. Consequently, investors are watching and waiting for distressed situations to emerge, rather than seeking value-add opportunities.
Industrial fundamentals weakened in 2024 as new supply outpaced demand for a second year. Vacancy rates are now elevated, but remain well below Global Financial Crisis levels, with Canada faring better than the US due to more limited development. While 2025 is expected to bring rebalancing, uncertainty around the consumer economy, tariffs and port labour persists.
The long-term demand outlook for North American industrials remains strong, however, with niche assets such as industrial outdoor storage and data centres benefiting from supply constraints tied to zoning and power supply. Rolling below-market leases continue to support returns and limit distress.
Ongoing headwinds flatten rental growth
The office sector is in a unique position, with occupancy rates slow to return to pre-pandemic levels and occupier demand growing more quickly at the higher-quality end of the market. This has left some markets strained, while others have backed off their high levels of availability. Rental growth is likely to flatten as the new supply pipeline moderates and landlords prioritise retaining and attracting tenants. Any rental growth will be concentrated at the very top of the market, as occupiers’ flight to quality continues.
Cash concessions, such as tenant improvement allowances and free rent, reached new peaks for office transactions over the past year. However, these may hit a ceiling if lenders start to baulk at providing additional capital for buildings with market values lower than the outstanding debt.
Industrial rents have remained largely flat over the past year, with some key markets, such as Southern California, seeing continued declines. While Covid-era gains are expected to largely stick, further rent growth will remain elusive for the foreseeable future, due to the ongoing supply-demand imbalance. Rising concessions and lower annual escalations on new leases are reducing effective rents, creating additional headwinds for landlords.
Office yields fall, industrial holds steady
Office valuations fell by double digits last year and are expected to continue falling this year, as cap rates move slightly higher. The looming distress in the office sector means many investors will continue to seek sharply discounted offerings.
Industrial yields are expected to remain largely stable, influenced by broader economic trends and Federal Reserve actions. Investor demand for well-located, leased prime assets should remain strong, driven by their popularity with tenants and low capital expenditures. Meanwhile, investor interest in niche industrial assets could drive cap rate compression as these subsectors become more institutionalised.
