The 2025 CRE Playbook
Commercial real estate is constantly evolving, and staying ahead means having the right insights at the right time. From market analysis and investment strategies to emerging opportunities and challenges, this newsletter will deliver the kind of insights you need to make informed decisions to stay competitive. It’s not just about data, it’s about connecting the dots, uncovering value, and helping you navigate the complexities of the CRE landscape with confidence.
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Whether you’re an investor, developer, broker, or simply passionate about CRE, it’s easy to feel overwhelmed by endless updates, fragmented insights, and conflicting trends. That’s why I’m creating newsletter to cut through the media noise and deliver thoughtful, curated CRE insights to subscribers.
2025 CRE Construction Outlook
Did Trump’s Win Change the Forecast
In 2024 developers were focused on completing existing project rather than starting new ones. This drop in construction starts across all major property types was a direct result of persistently higher borrowing costs. Muted new development may sound like much needed relief for multifamily and industrial investors. In the short run the lack of completions will aid vacancy and rent growth figures in these segments. However, the United States is experiencing a shortage of housing, exceptionally tight retail markets, and is at the front end of a movement towards reshoring/nearshoring many parts of the production process. The country will need more commercial and residential space by the turn of the decade. The current construction pipeline is not enough to reach long-run equilibrium in the real estate market.
All of this sets the stage for Trump’s second run in office. The campaign has floated several policy proposals that will directly impact the housing market and developers. In addition, Trump’s reelection spurred a substantial rise in confidence, both for consumers and business leaders, regarding the economic outlook of the country. While the long-term nature of CRE construction means we can have high confidence in the 2025 forecasts, both the president elects actual policies and investor-developer economic sentiment, or assumptions will impact the level and kinds of construction we see started in 2025 and beyond.
Confidence, Interest Rates, and Lending
Following election day, the 10-year treasury rate climbed sharply, something many investors and media pundits were surprised by given the Fed is in the middle of a rate cutting cycle. This is because the 10-year and capital costs for investors fluctuate based on the Federal Funds Rate, economic expectations, and the supply and demand trends within the bod market. Trump’s election inspired confidence that the economy would grow more quickly in 2025 and on, resulting in heightened yields on treasuries and higher borrowing costs for investors.
Trump’s impact in this way is a battle between two forces. On the one hand, if developers feel confident the nation will continue to grow, wages will keep rising, and more households begin forming, developers can reasonably handle elevated borrowing costs, because the upside to property performance is so much higher. At the same time, too much confidence in the economic outlook will keep mortgage rates and borrowing costs elevated. This is because heightened confidence in U.S. economic expectations shifts capital out of bond markets, so investors can chase higher yield investments. If economic optimism and hope for tax changes persist, it’s hard to imagine a significant drop in capital costs in the next few months.
The lending rate/10-year treasury spread for construction loans has narrowed slightly since the Fed began cutting rates, but many lenders are still heavily selective on development loan applications. Lenders should have a better idea of how their balance sheets stack up once the wave of 2025 debt maturities plays through the system. We expect development loans will be easier to obtain by the end of 2025 than they are today, but the tight lending conditions can create a cap on 2025 construction that falls well short of market equilibrium across the property-type spectrum.
Tariffs, Tax Cuts, and Inflation
As the primary cause of elevated interest rates, many have speculated if Trump’s policies could reignite inflation and spark a second round of Fed Rate hikes. While many of Trump’s proposed policies would apply upward pressure to prices, the expectation is that the Fed would react to this by holding rates flat, rather than returning to upward movement. But there are other ways the tariffs will impact construction trends moving forward.
The primary policies Trump has endorsed that would impact inflation are tariffs and tax cuts. Tax cuts put more money in consumers’ pockets, lifting demand for goods while having little to no impact on supply. By nature, this will pull prices upward in the economy. At the same time, tariffs on foreign good imports will either translate directly to higher consumer prices, or will reduce the amount of goods we import, reducing supply and providing an upward pressure on prices.
These issues are once again two-fold for CRE construction. If developers receive tax breaks at sufficiently high levels, it is likely new projects will pencil despite borrowing costs remaining elevated. The degree to which an individual development firm benefits or gains from adjusted tax policy will impact the net impact of the policy on CRE construction levels. It is impossible to tell what specific portions of tax reform will be pursued by the Trump administration. Investors should closely track the portions of any legislation related to developers and CRE investment.
One factor of the tariffs that will certainly discourage construction is inflating pricing for raw material costs like steel, lumbar, and energy. Construction costs spiked in 2020 and 2021, but returns were also spiking at the time and developers continued expanding pipelines until interest rate hikes began. Costs for raw materials like steel and lumber had been holding steady in the second half of 2023 and first half of 2024, but inflation for these items has picked up in recent months. If Trump does enact a blanket tariff on imports, the costs of raw materials would greatly change the investment math for real estate developers.
Immigration
Immigration has been cited by critics of the Trump campaign as a major deterrent to construction moving forward. The theory is that the construction industry would experience a significant shortage of workers if illegal and foreign-born workers no longer enter the workforce at the same velocity. While the Trump team’s policies are likely to remove some workers from the construction industry, the labor shortage of today’s economy is in a much better position to handle these changes than it was 2 years ago.
With labor dynamics closer to alignment the loss of some workers may delay certain construction projects from finishing but largely will not affect developers’ plans. The Matthews construction forecast itself accounts for expected construction delays, as many projects with expected completion in the fourth quarter of a given year will often not be finalized until well into the next year.
The Forecasts
Multifamily
In the post-pandemic environment developers responded swiftly to the spike in household formation. Multifamily starts hit record levels in 2022, matching perfectly with the record low observed for apartment vacancy. Because of how long multifamily projects take to go from proposal to completion, many of the units started in 2021 and 2022 began leasing in 2023 or 2024. As a result, a new construction record for apartments was set in 2023, only to be overshadowed by an even larger slate of 2024 projects.
The record setting development wave timed poorly with labor market cooling and Fed rate hikes, creating a situation where consumers were pulling back and playing more cautiously with their finances amid record supply growth. The result was a significant rise for apartment vacancy in 2024. As fundamentals worsened from records and borrowing costs elevated, developers slowly pulled back on activity, resulting in a significant drop for both units under construction and construction starts by the end of last year.
This drop in construction is timed based on both property performance trends and financial conditions, but it misses a critical demographic trend in the housing market. The Millennial generation is the largest in the country, and the largest swath of the U.S. population is situated between the average age of moving out from the parent’s home and the average age of a first-time homebuyer. The new units added in 2023 and 2024 will be absorbed once the market has time to adjust, and narratives surrounding the housing shortage will heat back up in the media and public.
In 2025 we expect 305,000 new units to be completed, 55% lower than the 2024 level. Limited new supply will give the 2024 pipeline time to fill without significant competition from new units. However, tightness in the housing market presents a double-edged sword for owners. The lower levels of new development will place downward pressure on vacancy and upward pressure on rents. However, it’s also likely to reignite local policy proposals regarded rent and vacancy controls, especially in the largest U.S. metros.
Housing affordability is a legitimate concern for a lot of Americans. Until the housing system is set up to facilitate higher levels of development, whether that be through tax cuts for builders or relaxed zoning regulation, apartment owners and investors will be forced to continue fighting the battle on rent control to help both owners and tenants. More supply is the solution to high housing costs, and more supply isn’t coming anytime soon in the multifamily market.
Retail
Retail real estate has emerged as an industry darling in 2024. The sector is avoiding the record setting construction pipelines and occupancy growth recorded in the multifamily and industrial segments. Much of this is the result of the “Retail Apocalypse” narrative that circulated through the media flowing 2008, in the late 2010’s, and in the aftermath of COVID-19’s onset. Experts speculated that the growth of e-commerce and failure of many big box retailers like Macy’s would lead to a massive overhang of available retail space in the U.S.
These predictions dissuaded speculative construction of retail space, with retail development never recovering from the Great Financial Crisis. Regional malls and struggling centers have slowly been renovated, leaving only high-performing centers and top tier malls on the market. Remaining retailers found ways to augment existing spaces to use online channels as a way of increasing in-store foot traffic. New kinds of experiential retailers, like pickleball clubs, health and beauty providers, and other gyms have filled the space left by firms like Sears and Bed, Bath, & Beyond. The pandemic reminded Americans how important it is to get out an interact with the world, a consumer preference change which aided retail performance throughout the pandemic.
This has led to one of the most competitive retail leasing environments in U.S. history. With development still muted, few retailers are looking to upgrade spaces. This has kept tenants in older centers and spaces longer, resulting in a retail market with very little tenant movement, and few opportunities for value-add investments.
For the last 10 quarters, vacant stock and vacancy rates have held flat for retail assets. This highlights the shortage in high-end retail space tenants are facing due to fewer and fewer newly constructed retail centers. In 2008, 231 million square feet of retail space was completed. For comparison, roughly 100 million square feet were completed in 2023 and 2024 combined. In 2025 developers are expected to complete even less space, just 36.4 million square feet nationally.
Limited new retail space will further impact on the leasing market in 2025. If the top performing firms don’t have great options to upgrade spaces, it’s likely that many tenants will stay put in 2025. This trend will help keep retail vacancy low. However, many retailers would eagerly upgrade to higher rent and higher quality space if it became available.
Industrial
Industrial markets exemplified the idea that a crisis can create opportunity during the pandemic. Global supply chains were hit with a once in a lifetime shock and e-commerce utilization accelerated rapidly. E-commerce’s market share has since returned to the pre-pandemic trajectory. However, heightened online ordering in tandem with nearshoring/reshoring of production created a boom period for industrial property performance. This is especially true in Sun Belt locales like Arizona, Texas, Florida, and Georgia, where goods that previously came from China through west coast ports are now increasingly arriving by truck at the southern boarder or at the ports of Houston, Miami, and Savannah.
As with multifamily, developers took notice of the lack of supply in 2021 and 2022, eagerly starting work on many 200,000 square foot and larger industrial sites. The entrance of these large facilities at a time with limited business expansion created a sharp rise in industrial vacancy. However, much of this rise is contained in the larger scale developments that make up much of the new supply. Property performance is still exceptional among smaller distribution spaces and niche subcategories like Cold-Storage and Industrialized Outdoor Storage, but the overall performance trends and the cost of capital has also disincentivized starting new industrial construction, even in the subcategories that are under built.
Builders are expected to complete 230 million square feet of industrial space in 2025. This is down sharply from the 366 million square feet delivered in 2024. Critically for investors, 50% of the 2023 and 2024 supply is concentrated in just 10 U.S. cities, with many on the list, like Phoenix, Dallas, and Atlanta, experiencing robust demand surges tied to nearshoring and reshoring.
If Trump follows through on a blanket tariff on foreign goods, its likely industrial space demand will diminish in the short run, bringing demand more into alignment with the diminished supply pipeline. But in the long run, a widespread movement towards nearshoring and reshoring would result in heightened U.S. industrial space use. Primarily occurring at many of the manufacturing-based facilities that have faced increased occupancy pressure for the last several decades.
Key Takeaways
While Trump’s team has several policies aimed at aiding development, it’s unlikely for a widespread impact will be felt in 2025. Construction pipelines are down between 30% and 60% depending on the property type. This will inform both our vacancy forecasts and rent forecasts in future newsletters. While current investors and owners may see limited development as a plus in 2025, the market does need to record significant inventory growth for all 3 property types if we want an efficient and balanced CRE landscape in the years and decades to come.
January Economic Data and Events
- December Employment – January 10th
- December CPI – January 15th
- December Retail Sales – January 16th
- December Existing Home Sales – January 24th
- Fed Meeting – January 28th and 29th
- December PCE – January 31st
