- Commercial real estate is showing signs of recovery as interest rates stabilize and asset values rebound, but the pace of recovery varies across sectors.
- The investment pendulum is swinging back toward asset selection, emphasizing active management over broad market strategies.
- Higher interest rates and falling asset values expose vulnerabilities, especially in office and apartment markets.
- Despite rising climate risks, market pricing for high risk assets remains misaligned.
- The rise of AI is driving demand for specialized data centers, reshaping investment opportunities.
Commercial real estate is entering a dynamic phase in 2025, marked by early signs of recovery, shifting investment priorities, and the growing influence of technology and climate risks.
While interest rate stabilization has brought relief to some sectors, others continue to grapple with structural challenges and debt-refinancing stress, according to MSCI. With active asset management and strategic selection playing an increasingly vital role, investors face a market full of opportunities and uncertainties.
1. Recovery: Not Everywhere All at Once
The commercial real estate market began recovering in 2024, with transaction volumes and asset values stabilizing. Falling interest rates have started to close the gap between buyer and seller expectations, but recovery remains uneven.
- Living and Industrial Sectors Dominate: Investors continue to favor residential and industrial properties, as well as tech-driven assets like data centers.
- Emerging Opportunities in Distress: Distressed assets, particularly in traditional office and retail sectors, present value opportunities for strategic investors.
- Debt-Focused Strategies: Private credit and debt funds are outperforming equity, providing an alternative route for capital deployment.
Capital growth for property assets globally has started to rebound
Share of assets with capital growth up, down, or unchanged from the prior quarter. Source: MSCI Global Quarterly Property Index
2. Asset Selection Takes Center Stage
Investors are turning toward granular asset selection as market conditions evolve.
- Shifting Performance Drivers: With limited yield compression, individual asset characteristics now play a crucial role in driving returns.
- Allocation vs. Selection: Historically, asset selection has driven 63% of deviations from benchmark returns, and this focus is returning as the market matures post-pandemic.
- Evolving Tenant Demands: Investors must adapt to technological disruptions and changing preferences to maximize asset performance.
Top-down vs. bottom-up: How selection and allocation have shaped performance
Source: MSCI/PREA U.S. ACOE Quarterly Property Fund Index
Get Smarter about what matters in CRE
Stay ahead of trends in commercial real estate with CRE Daily – the free newsletter delivering everything you need to start your day in just 5-minutes
3. Debt Refinancing and Underwater Assets
The high-interest rate environment makes debt refinancing more challenging, particularly for assets purchased during peak market conditions.
- US Offices at Risk: Approximately 30% of maturing office loans in 2025 are tied to underwater assets, with values falling below outstanding loan balances.
- Apartments Follow Suit: Around 10% of maturing apartment loans in the US face similar challenges, primarily due to overvaluations during 2022.
Sinking or swimming: US office loans may struggle
Loans outstanding as of Dec 3, including loans maturing in 2025 and originated in Q2. Source: MSCI Mortgage Debt Intelligence
4. Physical Climate Risk Remains Underpriced
Rising climate-related risks are yet to be fully reflected in property valuations.
- Southeast US Analysis: Multifamily properties in high-risk areas continue to trade at yields comparable to low-risk properties despite the growing threat of extreme weather.
- Market Imbalance: As insurance costs rise, pricing for high-risk assets will likely adjust, but investors can preemptively address these risks by reshaping portfolios.
No price discount yet seen for higher-risk apartment assets in Southeast US
“Low-medium” consists of “risk reduction,” “very low,” “low,” and “medium” risk in the MSCI Climate Value-at-Risk Model. “High-very high” consists of “high” and “very high” risk bands. High risk is defined as more than 5% of capital value at risk. RCA Hedonic Series cap rates.
5. AI’s Growing Influence
AI advancements are driving exponential demand for specialized data centers, changing the real estate investment landscape.
- Record Data-Center Acquisitions: Blackstone’s $16B purchase of AirTrunk underscores the scale of investment in this emerging sector.
- Specialized Investment Needs: Data center operations require unique expertise, creating barriers to entry for new investors.
- Global Trends: Markets like Asia-Pacific are seeing significant acquisition activity, reflecting the sector’s rapid expansion.
Record year for data-center acquisitions thanks to APAC megadeal
Thanks to Benjamin Chow, Niel Harmse, Alexis Maltin, Benjamin Martin-Henry, Lynette Ng, and Bryan Reid for their contributions.
WHAT TO WATCH IN 2025
- Sector Divergence: Expect living and industrial sectors to outperform as traditional office and retail recover slowly.
- Refinancing Stress: With $500B in US loans maturing this year, watch for distressed opportunities and potential market disruptions.
- Climate Adjustments: Pricing for climate risk will evolve as investors face rising costs and regulatory pressures.
- AI Ripple Effects: AI-driven demand for data centers may influence other property sectors, such as energy and logistics infrastructure.
As 2025 unfolds, commercial real estate offers both opportunities and challenges. While recovery is underway, it remains uneven, requiring investors to adapt to shifting priorities and emerging risks.
The growing influence of technology, particularly AI, is reshaping asset demand, while climate risks demand greater attention from decision-makers.
Navigating these dynamics will require strategic asset selection, active management, and a forward-looking approach to seize opportunities and mitigate potential pitfalls in a rapidly evolving market.
