With inflation coming down and deal volume recovering, the start of 2025 was a “very favorable place to be,” said Jim Costello, chief economist at MSCI Real Assets research and chairman of The Counselors of Real Estate‘s Economic Advisory Council.
“There was a ton of optimism in the sector early this year,” Costello said. “It was starting to look like we beat the ‘stay alive until 2025’ mantra. Deal volume and prices were climbing relative to last year. Many thought we were due for a turnaround very soon because we had some momentum going.”
The past several weeks, however, have left some commercial real estate investors feeling like the rug has suddenly been pulled out from under them, Costello said.
Bisnow spoke with Costello about what’s next for commercial real estate in 2025, including how federal policy changes will impact the way deals get done, how lower interest rates may affect the market and what asset classes are seeing the most activity.
President’s Tariff Jumpscare
Since April 2, when President Donald Trump unveiled sweeping tariffs on nearly 60 countries around the globe, commercial real estate professionals nationwide have been trying to decipher how their industry will be impacted in the coming months.
Experts fear that these tariff hikes will likely have profound effects on construction material costs and the supply chain. If disturbed by higher prices and longer lead times, commercial real estate professionals also are worried that the capital that’s finally started to get off the sidelines may pull back, leading projects to come to a screeching halt.
Costello added that the initial tariff response brought the 10-year Treasury down to 4% a few weeks ago, signaling widespread fear of an economic downturn. Since then, this rate has risen, but it’s still down from a high of 4.8% earlier this year — when investors expressed more confidence in the way the market was headed.
“The initial tariff reaction was one of, ‘Let’s jump into the safety of bonds,’ but then, over time, other groups have started pulling out of bonds,” he said. “One of our biggest exports is the 10-year Treasury, so if countries are not as easily able to sell goods into the U.S., they don’t need as many dollars. It’s all been tricky.”
Higher-For-Longer Interest Rates
Even among the commotion spurred by Trump’s new tariff policies, commercial real estate professionals are eagerly awaiting to see what the Federal Reserve will do with interest rates.
Interest rates held steady after the Fed’s last meeting in March, but with experts anticipating two cuts this year, many are anxious to see what move the Fed will make at its next meeting in early May.
Costello added that while low interest rates will be welcomed by many commercial real estate professionals, they are only a good thing if the economy is performing well with little uncertainty. Recently, some of the nation’s most influential companies, such as Goldman Sachs, have increased their predictions of a tariff-induced recession.
“A low interest rate environment, if you have strong economic growth, is helpful for real estate. But just low interest rates in and of itself doesn’t do anything for you,” he said.
Regional Market Performance
Costello said that prior to the pandemic, there were really only three major commercial real estate markets globally: London, New York and then everywhere else.
“That’s just the scale of how big each market was,” he said. “There was so much money focused on assets that dominate central London or Manhattan, including high-quality offices and hotels. London and Manhattan always specialized in these assets, but the money’s been rotating out of offices and those full-service hotels into logistics facilities and apartments.”
Due to this shift in investor behavior, places like Dallas and Los Angeles have seen a major uptick in real estate investment, making them hot spots — especially on the industrial and multifamily fronts.
Costello also said that these asset types are seeing more traction because they are “bite-sized,” meaning that investors don’t have to necessarily commit their whole portfolio to one or two large assets but can instead have a wider array of smaller assets.
“A garden apartment-type strategy is what people have been pursuing in markets like Dallas and LA because those assets are much more liquid,” he said. “There’s not as many restrictions. They’re big, sprawling markets so you have a lot of mid-sized properties as opposed to one giant property with 5,000 units.”
What’s Next For U.S. Commercial Real Estate
Costello said it’s hard to predict which asset types may perform well this year because the market is not dealing with “predictable shock.” Uncertainty has spiked to record levels because there’s not a very well-communicated strategy on tariff policy, he said.
“It’s just whatever day-to-day happens to be, so it stands differently compared to other periods of potential economic stress we’ve had where it was a little more slow-moving and not so much coming from one stroke of a pen,” Costello said.
It takes time for big market shocks like this to settle out, Costello said. As a result, people may be surprised to see deal flow continuing for quite a while before turning around.
“It’s just like when you get in the shower and you turn on the hot water,” he said. “It’s still cold for a time, so you turn it up more. Eventually it gets too hot.”
How investors access real estate may or may not shift in coming months as well, Costello said.
Over the past few years, he said, when real estate returns were still negative for the equity portion of the capital stack, there was a considerable amount of money starting to go into the private credit world — where returns weren’t necessarily “great” but they were positive and potentially less risky.
“If there was a problem with a property, the fund manager could foreclose on the property and get some capital back as opposed to being wiped out in the equity portion of the capital stack,” he said.
Now, with more uncertainty and pressure on real estate equity values, these managers may stick with debt investing for longer, Costello said.
“Maybe some of the folks who were active in that debt portion of the stack will continue to be active for a bit,” he said. “Uncertainty drives people to safer asset classes.”
This article was produced in collaboration between Studio B and The Counselors of Real Estate. Bisnow news staff was not involved in the production of this content.
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