PWC 2025 Emerging Trends in Real Estate

Cautiously Optimistic in 2025 as a New Cycle Begins: A summary of PWC and ULI's Annual Market Report

PWC's 2025 Emerging Trends in Real Estate report indicates a turning point in commercial real estate markets, marked by Fed Chair Powell's August 2024 announcement of monetary policy adjustment and subsequent 50-basis-point rate cut. Industry sentiment has improved significantly, with 65% of survey respondents expecting "good" or "excellent" profits in 2025, up from 41% the previous year.

Key developments:

• Fed projects additional rate cuts totaling 200 basis points through 2025
• Market stabilization occurred in the summer of 2024 after two years of declining property values
• Industry expectations remain moderate, acknowledging a "new interest rate regime"
• Focus has shifted from pandemic-driven changes to traditional cyclical patterns
• Data center demand continues strong growth, driven by AI expansion
• Tenant demand exceeds pre-pandemic levels in most sectors, though vacancies are rising
• Concern exists about potential weakening of tenant demand as the economy slows

The market recovery outlook is cautiously optimistic but gradual. While some investors view current prices as an attractive entry point, others await more transaction data to confirm pricing levels. Lower interest rates may improve transaction conditions but could signal weaker operating fundamentals ahead.

Trend #1: "Be Careful What You Wish For" highlights the complex implications of falling interest rates for commercial real estate. While the Fed's rate cuts (50 bps in September 2024, with 200 bps total expected through 2025) signal improved financial conditions, they may also indicate an economic slowdown ahead.

Key points:

• Industry anxiety over interest rates has eased but remains the top concern (4.30 on a 5-point scale)
• 80% of survey respondents expect commercial mortgage rates to decrease in 2025
• Economy shows mixed signals: 2.4% GDP growth in early 2024, strong employment (200,000 jobs/month), but 10-year Treasury yields suggest slowing ahead
• Lower rates will boost transactions and refinancing but may coincide with weaker fundamentals:
• Slower economic growth could reduce tenant demand
• Property income growth may slow
• Space absorption and rent growth may weaken

The market appears to be achieving a "soft landing" with increased clarity on financing conditions spurring renewed development interest. However, uncertainty remains high due to political factors and global risks, even as industry consensus builds around key financial metrics.

Trend #2: "A New Cycle Begins" highlights the recovery in real estate capital markets, with improving liquidity and transaction activity. Key developments:

Lending Market:

• CRE lending is up 2% in the first half of 2024 (vs 54% decline in 2023)
• MBA forecasts 26% growth in 2024 ($539B) and 24% in 2025
• Debt markets remain undersupplied: acquisitions (55%), refinancing (58%), development (75%)

Transaction Activity:

• Sales volumes are still 33% below the 2015-2019 average
• Industrial sales 4% below pre-pandemic levels
• Office sales 60% below pre-pandemic levels
• Market expects return to 2018-2019 activity levels by 2025-2026

Price Recovery:

• CRE prices down 20%+ from peak, with core sectors falling further
• Assets recovered less than 20% of lost value
• Sector variation: office down 33%, apartments down 20%, hotels down 10%
• Cap rates stabilizing, with most expecting decreases in 2025

Despite $1.2T in maturing debt (2024-2025), industry confidence remains high for workout solutions as liquidity returns. The survey indicates the strongest "time to buy" sentiment since the Global Financial Crisis, though recovery is expected to be gradual.

Trend #3: "Building Boom, Tenant Boon" highlights how surging supply across property sectors is shifting market power to tenants, creating a bifurcation between new and old properties.

Key Market Dynamics:

• Space demand exceeds pre-pandemic levels in most sectors except office
• Rising vacancies due to supply outpacing absorption
• Growing quality gap between new and old properties

Sector-Specific Impacts:

1. Retail: Historic bifurcation between well-located centers (especially necessity retail) and obsolete space continues
2. Office: Flight to quality accelerating, with new buildings outperforming despite historic low construction
3. Industrial: Over 1B sq ft added in two years

• 400M sq ft absorption in new buildings (2023-mid 2024)
• Negative absorption in older properties
• Tenants seeking modern features, energy efficiency, talent-attracting amenities

4. Multifamily: Construction boom causing temporary oversupply

• Rent declines in first two quarters 2024
• Long-term undersupply persists nationally

5. Specialized Sectors:

• Data Centers: Strong demand exceeds supply due to power constraints
• Life Science: Overbuilt post-pandemic, especially in secondary markets

The trend shows a clear market preference for quality across sectors, though the impact varies by property type and location.

Trend #4: "Now Where?" examines shifting migration patterns and the growing impact of climate change on real estate markets.

Key Migration Changes:

• Interstate moves declining despite historical upward trend
• Higher apartment renewal rates due to housing costs
• Remote work reducing job-related relocations
• Sunbelt migration moderating in key markets (Atlanta, Dallas/Fort Worth, Houston)
• Some Florida markets seeing population losses (Orlando, Tampa, Southwest Florida)

Factors Driving Changes:

1. Economic:

• Narrowing the cost-of-living gap between Sunbelt and coastal markets
• Reduced housing affordability advantage in Sunbelt
• Infrastructure limitations in fast-growing markets

2. Climate Impact:

• 45% of homes face severe/extreme climate risk
• Rising insurance costs, especially in Florida and California
• Hurricane Helene (2024) demonstrated the vulnerability of "climate haven" markets
• 1 in 7 households considered climate-related moves in 2023
• 80% of homebuyers now factor climate risk in purchases
• Younger (20-29) and older (60-69) demographics most affected

The trend suggests a fundamental shift in location decisions, with climate risk joining traditional factors like affordability and lifestyle in shaping migration patterns.

Trend #5: "Many Solutions, No Answers" examines the intensifying housing affordability crisis.

Key Issues:

• Home prices 50% higher than pre-pandemic levels
• Nearly 10% of homes valued at $1M+
• Mortgage rates remain elevated despite recent declines
• Half of renters are cost-burdened (>30% income on housing)
• Quarter of renters spend >50% of income on housing

Contributing Factors:

• Fed's inflation fight reduced housing inventory and new construction
• High interest rates stalled resale market
• Construction costs elevated
• Regulatory barriers to development
• Insufficient housing production

Proposed Solutions:

1. Zoning Reform:

• Eliminating single-family restrictions
• Allowing accessory dwelling units (ADUs)
• Mixed-use development on commercial land

2. Housing Innovation:

• Smaller home sizes (median down 355 sq ft to 2,164)
• Senior housing options
• Higher density development

3. Political Response:

• Presidential candidates proposing national solutions
• Democrats: 3M new units via subsidies
• Republicans: Deregulation and federal land use

Despite numerous proposed solutions, the crisis continues to worsen, requiring coordinated national action rather than just local initiatives.

As 2025 approaches, the real estate industry stands at a pivotal juncture characterized by both opportunities and challenges. While falling interest rates and improving capital markets signal recovery, structural changes in migration patterns and climate risks are reshaping investment decisions. The bifurcation between new and old properties continues to widen across sectors, with data centers emerging as a standout performer while traditional sectors adapt to changing demand patterns. The persistent housing affordability crisis demands national solutions, even as industry fundamentals improve. Success in this environment will require careful navigation of these interconnected trends, with investors and developers needing to balance short-term opportunities against long-term structural changes in how real estate is used, valued, and impacted by climate considerations.

PWC's 2025 Emerging Trends in Real Estate report indicates a turning point in commercial real estate markets, marked by Fed Chair Powell's August 2024 announcement of monetary policy adjustment and subsequent 50-basis-point rate cut. Industry sentiment has improved significantly, with 65% of survey respondents expecting "good" or "excellent" profits in 2025, up from 41% the previous year.

Key developments:

• Fed projects additional rate cuts totaling 200 basis points through 2025
• Market stabilization occurred in the summer of 2024 after two years of declining property values
• Industry expectations remain moderate, acknowledging a "new interest rate regime"
• Focus has shifted from pandemic-driven changes to traditional cyclical patterns
• Data center demand continues strong growth, driven by AI expansion
• Tenant demand exceeds pre-pandemic levels in most sectors, though vacancies are rising
• Concern exists about potential weakening of tenant demand as the economy slows

The market recovery outlook is cautiously optimistic but gradual. While some investors view current prices as an attractive entry point, others await more transaction data to confirm pricing levels. Lower interest rates may improve transaction conditions but could signal weaker operating fundamentals ahead.

Trend #1: "Be Careful What You Wish For" highlights the complex implications of falling interest rates for commercial real estate. While the Fed's rate cuts (50 bps in September 2024, with 200 bps total expected through 2025) signal improved financial conditions, they may also indicate an economic slowdown ahead.

Key points:

• Industry anxiety over interest rates has eased but remains the top concern (4.30 on a 5-point scale)
• 80% of survey respondents expect commercial mortgage rates to decrease in 2025
• Economy shows mixed signals: 2.4% GDP growth in early 2024, strong employment (200,000 jobs/month), but 10-year Treasury yields suggest slowing ahead
• Lower rates will boost transactions and refinancing but may coincide with weaker fundamentals:
• Slower economic growth could reduce tenant demand
• Property income growth may slow
• Space absorption and rent growth may weaken

The market appears to be achieving a "soft landing" with increased clarity on financing conditions spurring renewed development interest. However, uncertainty remains high due to political factors and global risks, even as industry consensus builds around key financial metrics.

Trend #2: "A New Cycle Begins" highlights the recovery in real estate capital markets, with improving liquidity and transaction activity. Key developments:

Lending Market:

• CRE lending is up 2% in the first half of 2024 (vs 54% decline in 2023)
• MBA forecasts 26% growth in 2024 ($539B) and 24% in 2025
• Debt markets remain undersupplied: acquisitions (55%), refinancing (58%), development (75%)

Transaction Activity:

• Sales volumes are still 33% below the 2015-2019 average
• Industrial sales 4% below pre-pandemic levels
• Office sales 60% below pre-pandemic levels
• Market expects return to 2018-2019 activity levels by 2025-2026

Price Recovery:

• CRE prices down 20%+ from peak, with core sectors falling further
• Assets recovered less than 20% of lost value
• Sector variation: office down 33%, apartments down 20%, hotels down 10%
• Cap rates stabilizing, with most expecting decreases in 2025

Despite $1.2T in maturing debt (2024-2025), industry confidence remains high for workout solutions as liquidity returns. The survey indicates the strongest "time to buy" sentiment since the Global Financial Crisis, though recovery is expected to be gradual.

Trend #3: "Building Boom, Tenant Boon" highlights how surging supply across property sectors is shifting market power to tenants, creating a bifurcation between new and old properties.

Key Market Dynamics:

• Space demand exceeds pre-pandemic levels in most sectors except office
• Rising vacancies due to supply outpacing absorption
• Growing quality gap between new and old properties

Sector-Specific Impacts:

1. Retail: Historic bifurcation between well-located centers (especially necessity retail) and obsolete space continues
2. Office: Flight to quality accelerating, with new buildings outperforming despite historic low construction
3. Industrial: Over 1B sq ft added in two years

• 400M sq ft absorption in new buildings (2023-mid 2024)
• Negative absorption in older properties
• Tenants seeking modern features, energy efficiency, talent-attracting amenities

4. Multifamily: Construction boom causing temporary oversupply

• Rent declines in first two quarters 2024
• Long-term undersupply persists nationally

5. Specialized Sectors:

• Data Centers: Strong demand exceeds supply due to power constraints
• Life Science: Overbuilt post-pandemic, especially in secondary markets

The trend shows a clear market preference for quality across sectors, though the impact varies by property type and location.

Trend #4: "Now Where?" examines shifting migration patterns and the growing impact of climate change on real estate markets.

Key Migration Changes:

• Interstate moves declining despite historical upward trend
• Higher apartment renewal rates due to housing costs
• Remote work reducing job-related relocations
• Sunbelt migration moderating in key markets (Atlanta, Dallas/Fort Worth, Houston)
• Some Florida markets seeing population losses (Orlando, Tampa, Southwest Florida)

Factors Driving Changes:

1. Economic:

• Narrowing the cost-of-living gap between Sunbelt and coastal markets
• Reduced housing affordability advantage in Sunbelt
• Infrastructure limitations in fast-growing markets

2. Climate Impact:

• 45% of homes face severe/extreme climate risk
• Rising insurance costs, especially in Florida and California
• Hurricane Helene (2024) demonstrated the vulnerability of "climate haven" markets
• 1 in 7 households considered climate-related moves in 2023
• 80% of homebuyers now factor climate risk in purchases
• Younger (20-29) and older (60-69) demographics most affected

The trend suggests a fundamental shift in location decisions, with climate risk joining traditional factors like affordability and lifestyle in shaping migration patterns.

Trend #5: "Many Solutions, No Answers" examines the intensifying housing affordability crisis.

Key Issues:

• Home prices 50% higher than pre-pandemic levels
• Nearly 10% of homes valued at $1M+
• Mortgage rates remain elevated despite recent declines
• Half of renters are cost-burdened (>30% income on housing)
• Quarter of renters spend >50% of income on housing

Contributing Factors:

• Fed's inflation fight reduced housing inventory and new construction
• High interest rates stalled resale market
• Construction costs elevated
• Regulatory barriers to development
• Insufficient housing production

Proposed Solutions:

1. Zoning Reform:

• Eliminating single-family restrictions
• Allowing accessory dwelling units (ADUs)
• Mixed-use development on commercial land

2. Housing Innovation:

• Smaller home sizes (median down 355 sq ft to 2,164)
• Senior housing options
• Higher density development

3. Political Response:

• Presidential candidates proposing national solutions
• Democrats: 3M new units via subsidies
• Republicans: Deregulation and federal land use

Despite numerous proposed solutions, the crisis continues to worsen, requiring coordinated national action rather than just local initiatives.

As 2025 approaches, the real estate industry stands at a pivotal juncture characterized by both opportunities and challenges. While falling interest rates and improving capital markets signal recovery, structural changes in migration patterns and climate risks are reshaping investment decisions. The bifurcation between new and old properties continues to widen across sectors, with data centers emerging as a standout performer while traditional sectors adapt to changing demand patterns. The persistent housing affordability crisis demands national solutions, even as industry fundamentals improve. Success in this environment will require careful navigation of these interconnected trends, with investors and developers needing to balance short-term opportunities against long-term structural changes in how real estate is used, valued, and impacted by climate considerations.