Real estate primed for recovery in 2025, despite higher rates, experts say

Real estate has been bent and broken over the past few years.

But whether the industry’s great expectations for 2025 are dashed — or realized — could depend on how well it comes to terms with end of a decade-long period of near zero interest rates.

Real estate executives said the asset class hit bottom in 2024 and that returns are on their way up. Even the hardest hit sector, office, is expected to begin its recovery journey.

However, for the industry to adjust to this new reality, managers will have to accept a higher cost of capital for the foreseeable future. While interest rates have been cut, most industry executives expect rates to remain higher than the former rock-bottom rates for quite a while. And a wild card is the incoming Trump administration, whose policies could hurt or further the asset class’ fortunes, industry insiders said.

At Blackstone, executives said real estate is recovering because they expect recent rate cuts to lead to a new real estate cycle of increasing property values and improving investor sentiment toward the sector, said Stephen A. Schwarzman, chairman, chief executive officer and co-founder.

"In January, we made the call that values in the sector were bottoming," Jonathan Gray, Blackstone's president and chief operating officer, said during the $1.1 trillion manager's third quarter earnings call in October.

"While the recovery will play out over time, the combination of lower base rates, lower borrowing spreads, and lower new supply makes the direction of travel quite positive for our real estate business," he said.

Where will rates move in 2025?

“The real estate industry is entering its next chapter where the alchemy of steadily falling cap rates and very low-cost debt is a thing of the past,” said Nancy I. Lashine, founder and managing partner of real asset placement firm Park Madison Partners.

Firm executives expect the Federal Reserve will “proceed cautiously with further rate cuts after December, which likely means commercial real estate should not expect a material decrease in borrowing costs in the near term,” she said.

“The impact of higher rates for longer is nuanced,” she added. For instance, higher borrowing costs likely means there will be fewer new construction projects, resulting in less competition in 2026 and 2027, Lashine said. However, less supply should ultimately benefit landlords’ ability to push up rents, she said.

Interest rates' direction of travel in 2025 is an essential metric for real estate investors.

“The reason interest rates are important is because they dictate the financing costs of real estate, which are a key driver for real estate asset values and returns of private and publicly listed real estate, said Rich Hill, senior vice president and head of real estate strategy and research at Cohen & Steers.

Cohen & Steers had $91.8 billion in assets under management as of Sept. 30.

For real estate investment trusts, “lower rates are a welcome release valve over the near term given the headwinds the sector faced as the Fed embarked on their interest rate hiking campaign,” Hill said.

“We believe the market cycle is turning in favor of listed REITs as the Fed cuts interest rates and engineers a soft landing,” he said. “On the private real estate front, lower interest rates will make it easier to secure financing and increase the likelihood of the transaction market starting to rebound.”

Still, not all real estate executives expect interest rates to decline next year

“We are of the view that interest rates will stay where they are or perhaps go up,” said Warren Wachsberger, chief executive officer of real estate firm Eldridge Acre Partners, which spun off from AECOM Capital in May.

The reason is that the 10-year Treasury went up 75 basis points since the first interest rate cut, Wachsberger said. One reason for that rise is that some people are concerned with the $1.9 trillion U.S. deficit, which could lead to reinflation, he said.

“People are looking at the long end of the yield curve (the part of the curve representing longer term bonds) and saying that you may need to increase rates,” Wachsberger said.

Rather than rate cuts, there could be reinflation, he said.

“You have to trust where the curve is showing you and 10-year Treasuries are showing that rates are going up, he said

Even so, Wachsberger said there could be more transactions, but mostly in industrial and multifamily sectors.

“I think people were waiting to see what would happen in the markets ... and there was uncertainty around the elections,” he said.

The impact of the higher cost of capital from the elevated interest rates on real estate money managers' businesses will vary depending on the manager’s business model and the property, said Ben Adams, CEO and founder of $672.3 million real estate manager Ten Capital Management,.

“For sure the large asset gathering behemoths will continue to roam the planet and be just fine,” Adams said. “It’s the smaller to middle-market investment management community that is under more existential pressure in the face of low transaction volumes and a really challenging fundraising environment.”

Indeed, Park Madison Partners’ Lashine said her team expects “the real estate investment management industry to continue its consolidation through M&A, particularly among middle-market managers seeking to achieve growth and scale.”

The average time from first to final close on a closed-end fund remains elevated at 23 months in 2024, Park Madison said in its 2025 real estate outlook, citing Preqin data. Investors are either investing with mega-funds offering diversified portfolios or "“sharpshooter” managers specializing in a single geography, property sector, or some other niche," Park Madison said.

“What we’re hearing from clients is access to capital is up,” leading the way to more transactions in 2025, said Bryan C. Connolly, co-chairman of the U.S. real estate practice of law firm DLA Piper. Redemption queues of open-end funds are shortening or have been redeemed and those managers now have room to transact, he said.

“For the largest players pricing has bottomed out” and dry powder is exceptionally high, Connolly said.

Overall, private real estate investors expect the NCREIF Property Index return to jump to 6.6% in 2025, from an expected return of 1.1% for calendar year 2024, according to the most recent Pension Real Estate Association Consensus Forecast Survey released Dec. 11. By comparison, the NCREIF Property Index reported -3.5% for the 12 months ended Sept. 30.

The results of the consensus, which was derived from a survey of PREA members in November, “seems in line with my interpretation of the zeitgeist in the market right now,” said Greg MacKinnon, PREA’s director of research in an emailed response to questions.

Office on the upswing

“There is a growing sense that we have hit the nadir of the current cycle, and that (this) year will be a better one for real estate,” MacKinnon said. “Certainly, no sign of a sharp turnaround ... but better than recent times.”

Even for the much-maligned office sector, the market expectation is for further depreciation in values in 2025 but much milder reductions than in 2024, MacKinnon said.

Office is expected to return 2.6% in 2025, up from -6.3% in 2024, the PREA consensus forecast shows.

The expectation is that write downs in the office sector are almost complete, he said.

Even so, challenges will remain for the office sector, “where persistent headwinds are expected to create distressed sales opportunities for value-add and opportunistic strategies,” said John Berg, global head of private real estate, Principal Asset Management, in a written statement.

Consensus survey respondents anticipate that retail will be the best performing of the four traditional real estate property types, which also includes industrial and residential.

“That may surprise some people, but retail has actually been the best performer the last couple of years,” MacKinnon said.

“Continued good performance of retail, especially strip centers, is really based on almost no new supply over the past several years, and the fact that a lot of the bad news for retail regarding e-commerce was already baked into prices even pre-COVID,” he said.

With construction costs way up, there is little indication of a substantial amount of new retail projects in the works, “meaning that asset owners will continue to have pricing power, which is good news for returns in the sector going forward,” MacKinnon said.

“That being said, these are only expectations and only time will tell how things actually turn out,” he added.

Logistics, data centers retain appeal

Industry insiders expect logistics and data centers to be the big winners in 2025 driven in part by needs of the growing AI sector.

“Asset valuations have stabilized, creating a solid foundation for renewed transaction activity, particularly in areas such as logistics, residential and data centers,” Berg said.

There is “intense demand” for data centers due to the rise of AI and supply of data centers is limited by the required power supply, DLA Piper's Connolly said. Mulfamily properties are also significantly in demand while retail and industrial are performing well, he said.

“We’re seeing a situation where buyers and sellers of real estate are now understanding we’re going to be in a higher interest rate environment for an extended period of time,” Connolly said.

In an interview last year, Douglas W. Lyons, managing principal of real estate firm Pearlmark, said he is “optimistic about an increase in transaction activity heading into 2025.”

He said the industry was impacted by the rise in interest rates and now after the election, interest rate volatility appears to be “settling down.”

“We believe there is a significant wall of debt maturities needing to be addressed and capital to be deployed for real estate private credit, understanding that the banks are on sidelines,” Lyons said.

Overall there will be about $1.6 trillion in real estate debt maturities over the next three or so years, with about 25% or 30% of those loans being extended, he said.

For the remaining percentage that aren’t extended, a number will qualify for refinancing, which will be an investment opportunity for real estate debt managers.

Principal Asset Management’s Berg also expects an increase in recapitalizations in 2025.

“Given the volume of loan maturities, coupled with improved transparency in asset pricing, it is likely to drive recapitalizations and creative repositioning of assets,” Berg said. Investors who focus on sectors supported by secular trends and demographic shifts such as logistics, residential, and data centers “will be best positioned to navigate these complexities and capitalize on emerging opportunities” in 2025, he said.

A wild card

Still, at any moment there could be a twist of fate for the real estate sector brought on by policies of the Trump administration, industry executives say.

Ten Capital Management’s Adams is “torn” on the new administration’s policies on real estate “in part because Trump’s policies are in some ways at odds with normative conservative policy positions — particularly on the issue of tariffs,” he said.

“The obsession over tariffs makes me a bit queasy. Near term, tariffs may lead to goods stockpiling, which would be positive for warehousing demand,” Adams said. “But higher tariffs will almost certainly increase construction costs on the material side of the equation, and, coupled with proposed restrictions on immigration, we could exacerbate labor shortages in the construction industry, leading to increased costs and project delays.”

This would likely impact the supply of new commercial properties and affect transaction volumes, Adams said.

However, deregulation and new tax cuts could “provide stronger than anticipated GDP performance, which could drive improved occupier performance, boost investor confidence and reduce barriers for businesses, potentially leading to increased property values and transaction volumes, " Adams said. Looser fiscal policy is likely to stimulate economic growth, benefiting commercial real estate as well, he added.