Commercial real estate outlook

Q1 2025 Commercial real estate outlook: Breaking ground on a rebound

After 30 months of correction, the U.S. CRE market finally appears poised to commence a rebound. New federal policy should benefit CRE, but also keep interest rates elevated.

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January 17, 2025 | 7 minute read

The U.S. commercial real estate market is set to embark on a recovery path in 2025, with the late 2024 rise in interest rates casting only a modest shadow over its renewed momentum. The economic outlook appears supportive of space demand and supply growth is set to begin its plunge, laying the foundation for a healthy fundamental backdrop. Still, property values are priced to this optimism, limiting upside potential. We envision sparks of a gradual 2025 rebound beginning to fly in Q1.1

As we discuss at length in our 2025 CRE Outlook, we expect the U.S. commercial real estate market to enter recovery mode in 2025. Sentiment has turned as investors internalize a positive economic outlook and a reset in property values. Fundamentals, which have been impressively resilient despite myriad challenges since 2022, are set to improve in the coming years. The capital markets gears have begun to turn again, as evidenced by the surge in commercial mortgage-backed securities (CMBS) issuance and strong lending activity from alternative lenders. Interest rates remain the market’s limiting factor, though we expect higher-for-longer to impact the slope of the rebound rather than its probability of occurrence.

Key takeaways

  • After a two-and-a-half-year correction, the CRE market is set to rebound in 2025.
  • We expect higher-for-longer rates to impact the slope of the rebound, not its occurrence.
  • A new U.S. administration takes office in Q1, bringing pro–real estate policy priorities.

  • U.S. BLS, as of December 31, 2024.

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Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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Andrew Korz, CFA

Executive Director, Investment Research

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