As we move into 2025, commercial real estate (CRE) is on the cusp of a transformative year. The market is poised for growth, but it will come with its own set of challenges and opportunities. To thrive in the evolving landscape, real estate stakeholders must stay ahead of the curve, understanding the intricate dynamics of supply, demand, technology, and sustainability. Below are the top five predictions that will shape the CRE industry in 2025.
1. Supply Shortages Will Worsen for In-Demand Assets Across Property Types
The lack of new supply will continue to impact CRE sectors across North America and Europe. New building activity is expected to decline further in 2025, with offices and industrial spaces seeing the most significant drop. In the U.S., for example, office space completions are predicted to fall by 73%, particularly in key cities like Boston, Chicago, and New York. Similarly, industrial properties will experience a 56% decrease in new supply. In Europe, cities such as London, Paris, and Madrid will face intense competition for high-quality space, as the limited supply makes it more challenging for tenants to find prime locations.
Data centers will also face critical shortages in many global markets. Despite increased supply, demand driven by AI and other technological advancements will still outpace growth. For CRE investors and tenants, this means strategic planning, flexibility, and proactive engagement will be essential to secure the best assets.
2. Early-Mover Advantage May Peak in 2025
Investors in CRE will need to act quickly to capitalize on market conditions before they stabilize. Historically, commercial real estate has proven to outperform other asset classes over five-year cycles, particularly during periods of market dislocation. As the market recovers in 2025, early movers are likely to reap the rewards before competition drives returns down.
Liquidity in the market is expected to improve, with institutional investors returning and bidding intensifying. As interest rates stabilize, we will see greater activity in core sectors like logistics, living, and alternative assets. For investors, understanding local supply and demand dynamics, and selecting the right assets, will be crucial for achieving strong returns.
3. Growing Corporate Confidence in Portfolio Requirements
As the global economy stabilizes, more businesses are expected to execute on their commercial real estate strategies, particularly in the office sector. Following years of downsizing, many companies will begin expanding their space requirements to accommodate a hybrid workforce model. Office attendance policies are shifting, and more organizations will require their employees to be present at least four days a week, prompting the need for larger, more flexible office spaces.
For CRE landlords, this means a higher demand for high-quality, well-located office space in vibrant neighborhoods. Companies will prioritize spaces with strong sustainability credentials and those that can provide a “destination workplace” experience to attract and retain talent.
4. Action on Obsolescence Will Accelerate
As market conditions change, some properties will face the risk of becoming obsolete. Aging office buildings, in particular, are at risk as tenants continue to prioritize modern, energy-efficient, and well-located spaces. Between 322 and 425 million square meters of office space globally may require significant capital expenditure to remain viable. This could represent a potential investment of up to $1.2 trillion.
Property owners will need to focus on retrofitting and repositioning buildings to meet new tenant expectations, particularly around sustainability and energy efficiency. The increasing demand for residential and mixed-use spaces will create opportunities to repurpose older office buildings, especially in urban areas facing housing shortages.
5. Decarbonization Efforts Will Accelerate Amid Rising Energy Costs
As energy prices rise and concerns about energy security grow, real estate owners will face increased pressure to decarbonize their portfolios. Decarbonization will no longer be viewed merely as an ESG initiative but as a critical component of operational and risk management. Investing in energy-efficient retrofits can lead to significant cost savings, with light retrofits potentially saving up to 40% in energy costs.
For CRE stakeholders, 2025 will see a major shift towards energy-efficient buildings as a strategic advantage. Not only will this help reduce operational expenses, but it will also ensure compliance with tightening sustainability regulations and appeal to tenants seeking greener, more sustainable spaces.
