Commercial real estate challenges & opportunities in 2025

Challenges in commercial real estate

It’s no secret that the commercial real estate market has been struggling in recent years. From May 2022 to December 2023, CRE property values fell by over 21%. Since then, however, they’ve gradually rebounded, increasing by 4.3% over the last 12 months.

Meanwhile, a massive $957 billion of CRE loans are due to mature in 2025 (a 3% increase from last year), triggering a wave of refinancing in the current high-interest rate environment. For many borrowers, the only way out may be to sell their properties.

Here is a brief description of some other CRE challenges facing investors and property owners.

High cost of entry

Commercial properties can be expensive. Many can be beyond your budget. Even if you find an asset you can afford, you may not want to put all your eggs in one basket. One way out is to route your investment through a crowdfunding platform. Some accept non-accredited investors, while others require you to be accredited*.

* Accredited investors can invest in securities that may not be registered with the financial authorities. The Securities and Exchange Commission lists certain income, wealth, and other criteria defining these investors.

Rising interest rates

Commercial property prices and interest rates are inextricably linked. Rising rates have a negative effect on property valuations. Unfortunately for the commercial real estate industry, interest rates have skyrocketed. In the last few years, the Fed rate has gone up from near-zero to over 5%. Though they’ve fallen slightly since then, they remain above historical norms.

Fed rate changes from March 2022

Here is the same data in a graph:

Fed rate hikes from March 2022

Source: Federal Reserve Bank of St. Louis

Although elevated interest rates are a big negative, experienced investors with adequate liquidity can take advantage of increasing rates and falling property values to buy distressed assets. Additionally, the high-interest-rate environment puts buyers in a better position to negotiate with sellers.

Growing insurance costs

Property insurance costs have steadily risen since 2018, and some properties have been more impacted than others. For the worst 5% of properties, insurance costs went from a 4% share of property revenue in 2018 to an 8% share in 2025. This comes as billion-dollar natural disasters steadily increase in the U.S.

Changing economic climate

High interest rates have another adverse consequence. In addition to depressing property prices, they result in a slowdown in general economic activity. This further lowers the demand for commercial property and changes the outlook for commercial real estate.

Surge in office vacancy rates

The post-COVID world has dealt a body blow to some sections of the property sector. Work from home seems here to stay, and this change is reflected in escalating office vacancy rates. According to data on Statista, office space vacancies stood at 12.6% in Q1 2020. Today, they are at 21%.

Will office occupancy rates pick up anytime soon? It’s unlikely. A recent analysis by Green Street, a real estate advisory firm, states that it could take five years or more for U.S. office occupancy to reach the level it was at before the pandemic.

ESG considerations

The importance of environmental, social, and governance (ESG) considerations is one of the most significant commercial real estate trends that have developed in recent times. Building owners, property developers, investors, and other commercial real estate stakeholders must familiarize themselves with ESG government regulations and ensure compliance.

The following is a brief definition of each ESG component:

• Environmental: This refers primarily to the building’s carbon footprint, waste management, and water usage.
• Social: What is the impact of the property on tenants and the local community?
• Governance: This ESG component concerns diversity, equity, and inclusion (DEI). It considers issues like whether the property discriminates based on race, gender, or religion.

The good news is that properties that pay adequate attention to ESG factors can gain a strategic advantage and increase asset value. Sustainable and green offices are the future. Property owners and developers should take proactive steps to comply with ESG rules.

Digital economy growth

As the digital economy expands, it will continue to impact commercial real estate. Take data centers, for instance. Demand for data center facilities is expected to mushroom. A report from the management consulting firm McKinsey & Company estimates that data center demand will grow by 10% per year until 2030.

However, the CRE industry has several hurdles to overcome to meet this increased demand. One of the biggest is energy. A data center can consume as much power as 80,000 households. Additionally, zoning regulations may need to be changed to accommodate the buildings that house the computers and related equipment. However, the ongoing expansion of the digital economy will ensure that data centers remain a growth area for years to come.

Evolving demographics and market demands

Demographic trends have contributed to the CRE market undergoing a sea of change in recent years. The following are the biggest contributors to the change:

• More and more people are working from home. Office real estate has borne the brunt of the switch to WFH.
• Millennials, the country’s largest generation, prefer to live in the suburbs. Consequently, demand for single-family homes in suburban areas is expected to get a boost.
• People are migrating from the Northeast and the Rust Belt to Florida, Texas, and the other Sunbelt states. This movement will significantly impact the commercial real estate outlook across both areas.

Shift toward experience-driven spending

Thousands of brick-and-mortar retail stores have closed in recent years, giving retail real estate a bad name. However, this doesn’t mean retail is dying.

Colliers, a leading real estate services and investment management company, points out that in 2023, there were 5,865 store openings but only 4,070 closings. One factor behind this expansion is experiential retail, a response to online retail. Brands are fighting back against Amazon and the likes by setting up stores that offer an omnichannel shopping experience to rival online retailers.

Workforce housing shortages

The lack of affordable housing has been a stark reality for years. One estimate puts the shortage of affordable rental homes at 7.1 million. Rising land prices and construction costs have exacerbated the problem, and no obvious short-term solution exists.

Demand for Class-A office space

There have been a lot of headlines about the oversupply of office CRE. A 2023 report points out that up to one-third of office space could be wiped out in the coming years. While this may turn out to be true, it hides a related fact: There is a shortage of Class-A office properties.

Tenants require modern, newly built offices that meet their needs. The same is true for the retail sector. Every commercial real estate broker and developer should realize that the immediate requirement is retail and office transformations that cater to tenant preferences and needs.

Regulatory and legal challenges

Regulatory and legal challenges can fall into many categories:

• Zoning and land-use rules
• ESG requirements
• Tax laws
• Building codes

The best way to minimize your level of risk from regulatory and legal challenges is to seek help from an experienced legal professional.

Complex tax calculations and deductions

Real estate is known for its tax benefits, but deducting expenses from your taxable income can get complicated fast. Between bonus depreciation, cost segregation, 1031 exchanges, qualified business income, and depreciation recapture, there’s a lot to calculate. Consult a real estate tax professional for help.

Limited liquidity

A December 2023 report from the National Bureau of Economic Research (revised in December 2024) states that because of declines in property values following WFH policies, 14% of all commercial real estate loans and 44% of office loans are in negative equity, which means the value of the property is less than the outstanding loan balance.

Raising money for new CRE projects is becoming more difficult in this environment. Wells Fargo, the country’s largest CRE lender, has recently tightened credit norms.

Substantial commercial real estate debt

According to a report by the Mortgage Bankers Association, 20% ($957 billion) of $4.8 trillion in outstanding commercial mortgages held by lenders and investors will mature in 2025, a 3% increase from last year. While the Federal Reserve cut its short-term interest rate target by 1% in 2024, long-term interest rates increased over the same time by an equivalent amount. As a result, many loans that might have matured in 2024 were extended into 2025.

Rapid growth of artificial intelligence

Since the public release of ChatGPT in 2022, artificial intelligence (AI) has taken the world by storm. Already, 90% of CRE companies plan to integrate AI to support human experts over the next five years. This could lead to the automation of some entry-level CRE positions and efficiency boosts in other areas.

Expert tip: How to navigate 2025 CRE market uncertainty like a pro

No doubt, the 2025 CRE market is filled with a lot of uncertainty. Here’s how to navigate the challenges and opportunities like a pro:

• Don’t panic sell. If you’re holding a quality asset in a strong market, avoid overreacting to market noise. Value tends to recover, and sometimes faster than you’d expect.
• Focus on the fundamentals. Location, tenant quality, and lease terms often matter more than macro headlines. A solid NOI can weather most economic downturns.

Stay plugged in. CRE markets are local. Build relationships with brokers, lenders, and partners who have their boots on the ground where you want to invest. A strong network can make the difference between a good deal and a bad one.

Miles Urban Hector

Miles Hector is a Solutions Engineer at Agora in New York. He began in ABS and derivatives at Bank of America Merrill Lynch before moving into real estate private equity, focusing on infill development financing in the Western U.S., particularly Los Angeles County.

• 

Tips to navigate commercial real estate challenges

The following table outlines the steps you can take to meet the current CRE challenges:

Opportunities in the commercial real estate market

Here are two CRE industry developments that can present new opportunities for investors and developers:

Evolution of workspace trends

The office market is in a sorry state because of remote working. However, Class-A office space is doing well. According to CRE services firm Cushman and Wakefield, rents for Class-A office buildings command a 51.5% premium over other office space. And there may not be enough high-quality office stock to meet demand.

Property managers should stay on top of evolving workspace trends by adopting smart real estate management techniques instead of continuing with a business-as-usual approach.

Emerging markets and urbanization

Some of the CRE markets expected to do well in the immediate future include:

• Dallas/Ft. Worth, TX
• Miami, FL
• Houston, TX
• Tampa/St. Petersburg, FL
• Nashville, TN

Benefits of investing in commercial real estate

CRE investments can offer many benefits:

• Cash flow: CRE properties provide owners with a regular cash stream in the form of rents paid by tenants.
• Appreciation: Commercial properties have the potential to increase in value. You can make significant long-term gains if the property appreciates and you hold on to it long enough.
• Diversification: Within the CRE asset class, there are many options to choose from:
  • Multifamily
  • Retail
  • Industrial
  • Office
  • Hospitality
  • Mixed use
• Tax benefits: Property owners can receive several types of tax benefits, including accelerated depreciation and interest deductions. Certain tax benefits are also available for an investor’s beneficiaries.

Solving 2025 CRE challenges with technology

No matter what 2025 brings for the CRE industry, the right tech can help you be prepared. Here are a few ways to tackle CRE challenges and opportunities moving forward:

• Automate routine workflows. Save time and money by automating recurring tasks, such as onboarding tenants, collecting rent, and scheduling maintenance.
• Boost data analysis. Leverage your data with analytics to forecast rental growth, assess market risk, and make more informed investment decisions.
• Strengthen communication and collaboration. Use a next-gen investment management platform to streamline communication between GPs and LPs.
• Offer immersive virtual property experiences. Use virtual 3D tours and virtual staging to attract a wider pool of potential tenants and buyers.
• Leverage smart building systems. Adopting Internet of Things (IoT) technology to optimize energy use can lower utility costs and increase net operating income (NOI).
• Streamline accounting operations. Invest in specialized CRE accounting software to reduce human errors, ensure compliance, and simplify financial reporting.

The bottom line

The CRE market is slowly recovering from a slump. However, a well-researched and intelligent approach can provide investors and developers with profitable opportunities. Remember that your chances of success increase if you focus on developing meaningful collaborations and partnerships within the industry and adopting a well-thought-out approach to ESG.