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Ten Challenges Facing Commercial Real Estate in 2025
Many of the issues confronting industry stakeholders in the new year are interrelated.
The impact of dozens of elections around the world — most notably the U.S. presidential election — are top of mind for commercial and multifamily real estate advisers. These elections could shift the political winds in numerous countries and reshape how real estate professionals do business.
This past fall, the Counselors of Real Estate, an international consortium of real estate problem solvers who provide advice on complex real property and land-related matters, released its top 10 issues likely to affect the industry in 2025. The issues were determined through broad membership polling, discussion and debate. Political uncertainty led the list of pressing issues.
In the United States, a new Trump administration is likely to usher in both challenges and opportunities. The stated intention to streamline or eliminate regulatory processes and bureaucratic red tape (like restrictive climate change policy) would expedite construction timelines, which would enable faster deliveries and lower costs. This could be particularly impactful in the single-family and multifamily sectors, where increasing the pace of construction and lowering costs are key to addressing the housing shortage and affordability crisis. And while most land use and zoning regulations are established at the municipal level, which is outside the authority of the executive branch, the incoming Trump administration has proposed releasing federal land tracts for housing development.
On the other hand, the president-elect’s stance on international trade policy may have adverse consequences for commercial real estate markets — and commercial real estate development in particular. Increases in import tariffs have been shown to increase the cost of intermediate inputs used in construction, such as steel, lumber and other raw materials that are often sourced globally. The impact on global supply chains and construction costs could lead to a slowdown of both new and existing projects, while also shrinking developers’ profit margins. Additionally, while President-elect Trump’s immigration policies may limit additional stress on housing demand, they would also reduce the flow of new workers to the construction industry.
One boon for real estate investors is that there likely won’t be changes to 1031 exchanges, a tax deferral strategy that enables investors to delay the payment of capital gains tax. The Biden-Harris administration’s proposed 2025 budget included a cap on 1031 capital gains tax deferrals of $500,000 per taxpayer annually. That had caused a great deal of concern among investors.
Here are nine other challenges that commercial real estate professionals should monitor heading into 2025.
High Financing Costs
No one in commercial real estate escaped the interest rate spike over the past couple of years. While the Federal Reserve lowered its benchmark interest rate by 50 basis points in September and another 25 bps in November, financing challenges remain.
Even though transaction volumes are stabilizing, uncertainty plagues buyers and sellers amid interest rates that are still elevated. As a result, the Counselors of Real Estate believes buyers and sellers will exercise caution heading into 2025. Complicated deal assessments and market valuations will keep some folks on the sidelines. When they come off, many buyers will concentrate on deals with higher cap rates.
Amid ongoing market uncertainty, the organization believes a robust rebound for commercial real estate transactions won’t happen for another couple of years.
Massive Commercial Real Estate Debt
The commercial real estate sector is slipping closer to a debt cliff. In 2026, $1.8 trillion in commercial loans are scheduled to mature. Some lenders are extending these loans as they await an uptick in the market, yet they still must cope with regulatory concerns and inadequate capital reserves.
Although forecasters predict the Fed’s benchmark rate will slide to around 3.5%-3.75% by the end of 2025, borrowers who took out loans at sub-4% cap rates might be hit with a 75% to 100% jump in debt service payments.
This scenario — which makes refinancing more difficult — promises to seriously influence market dynamics in 2025, including competition and tenant retention in commercial real estate.
High Cap Rates
As investors account for greater risk from situations like global instability and supply chain disruptions, the Counselors of Real Estate expects cap rates to climb in 2025.
Such turmoil plays a major role in economic factors like inflation, housing affordability and monetary policy, all of which affects real estate pricing and risk-adjusted returns. Amid this environment, investors should adjust their strategies to reflect specific market conditions rather than historical cycles.
Soaring Insurance Costs
Inflation, higher property values and natural disasters have driven up property insurance premiums. This is especially true for residential, hospitality and senior living properties.
In particular, losses from natural disaster claims are causing anxiety among property insurers. In 2023, global natural disasters generated $380 billion in losses. Of these, 31% were covered by insurance, putting insurers on the hook for billions of dollars in claims.
As property owners grapple with rising insurance costs, we expect them to zero in on factors such as risk management and appropriately sized coverage to lower expenses related to protecting their assets.
Increasingly Unaffordable Housing
The dream of homeownership continues to fade for some Americans due to worsening affordability. Two key factors contribute to this: rising costs and housing shortages.
This puts more pressure on the multifamily sector. The Counselors of Real Estate believes declining multifamily construction and greater demand from younger renters will aggravate affordability challenges in 2025. Already, a little over half of renters spend more than 30% of their income on housing. It won’t be a surprise if the share of cost-burdened renters increases in 2025.
To ease the strain of housing affordability, we should build even more housing and preserve housing units that already are affordable. To achieve this, the private sector must step up.
Rise in Artificial Intelligence
Artificial intelligence dominates today’s business landscape, and the commercial real estate sector is no exception.
Extreme weather events are driving up insurance costs and will likely lead to greater focus on resilient properties in the coming years. CHUYN via iStock/Getty Images Plus
In 2025, commercial real estate professionals will continue to confront challenges such as fragmented data and location-specific distinctions. Meanwhile, as AI algorithms demand additional computing power, the AI-fueled frenzy over data centers might be dampened.
Impact of Extreme Weather
October’s back-to-back hurricanes in Florida and the Southeast are just two examples of the threat extreme weather poses across the United States. While the European Union and the United Kingdom are adopting strict rules surrounding sustainability, U.S. regulations are far less stringent.
Considering the tremendous impact of extreme weather events, 2025 could be the year when the need for resilient properties takes on greater urgency. For property owners, this could mean boosting investment in green technologies and other resilience-enhancing measures.
Lingering Office Vacancies
The pandemic slashed demand for office space, particularly in urban cores. This triggered double-digit office vacancy rates and declining property values, most notably in places like New York City and San Francisco.
Amid the ongoing recovery of the office market, some property owners in 2025 and beyond will embrace adaptive reuse. Therefore, we should expect more office buildings to be converted for use by residential, health care and education tenants, among others.
While adaptive reuse can help resolve the glut of empty office space in some markets, it remains a potentially costly and complex approach.
Narrower Buyer-Seller Price Gap
The good news on the gap between buyers’ and sellers’ price expectations is that the divide is narrowing. Stronger rent growth and interest rate declines could further propel this trend. But with a slew of property loan maturities on the horizon, sellers may need to tweak their pricing expectations, potentially lifting deal volumes as refinancing pressures grow.
Anthony F. DellaPelle, Esq., CRE, is global chair of the Counselors of Real Estate.
