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CRE in 2025 looks promising according to Wells Fargo
Economists at Wells Fargo think 2025 could be a promising year for commercial real estate, although the runway is not completely clear of obstacles.
Commercial real estate in 2024
The industry experienced a strong rebound to close 2024 due to elevated consumer spending and improved household balance sheets. However, policy changes regarding immigration, taxes, and environmental regulations could challenge that progress in the near term. Even so, economists expect lower taxes and a more friendly business environment to buoy the commercial real estate sector in 2025 and beyond.
What’s ahead for CRE?
“A more lenient regulatory approach and lower taxes rates could help boost demand over the long-run,” economists wrote in a recent note.
It’s no secret that commercial real estate has faced significant headwinds over the last several years as inflation and high interest rates depressed demand. However, the economic tides appear to be turning in favor of commercial owners.
The economists noted that both inflationary and labor market pressures appear to be easing. For instance, November’s inflation report showed that seasonally adjusted consumer prices were up just 2.7% over the previous year, which is nearing the Federal Reserve’s target of 2%. Meanwhile, unemployment ticked up slightly to 4.2%, suggesting that the labor market continues to soften.
Capital flows are also strengthening, which means that it is becoming easier to finance commercial deals. According to Wells Fargo, commercial loans were 59% greater in Q3 2024 than in Q3 2023. Lenders from private credit to life insurance companies and banks reported higher volumes as well.
Vacancy rates have also plateaued due to lower construction volumes across all property types. Vacancies for offices and industrial properties were virtually unchanged year-over-year. Meanwhile, strong consumer demand continued to support retail and hotel occupancy growth.
Determining factors
The economist noted that the capital markets will determine whether commercial real estate continues its trajectory. That will largely depend on activity in the 10-year Treasury yield. As of this writing, the 10-year rate was t4.62%, up about 10% over the last month. Capital should “continue to move off the sidelines” if the 10-year rate declines, the economist said.
