As we approach 2025, the commercial real estate (CRE) landscape is marked by a complex interplay of challenges and opportunities. The post-election period has brought renewed momentum to certain segments of the market, while structural shifts in financing, investor behavior, and asset performance continue to redefine the path forward. This article expands on key trends shaping the market, providing actionable insights for investors, developers, and stakeholders navigating these uncharted waters.
Lenders Reopen CRE Business to Select Clients
In the wake of the election, anecdotal evidence suggests lenders are reopening their CRE lending channels, albeit selectively. Several industry players have reported conversations with lenders indicating that financing is available for existing and new clients who can contribute “some” deposits. This represents a cautious yet meaningful shift after months of tightened lending criteria.
Banks are strategically prioritizing asset classes such as multifamily, industrial, and retail, steering clear of office investments still plagued by uncertainty. This sentiment aligns with recent findings from Deloitte, which indicate that banks are shifting focus toward resilient sectors with strong cash flow and stabilized occupancy. For borrowers, this is an opportune moment to leverage relationships with lenders and secure financing for acquisitions or refinancing.
Multifamily Syndicators Facing Debt Pressures
One of the most notable trends emerging in multifamily markets is the increasing number of syndicators and owners capitulating under the weight of floating or bridge debt. This is particularly pronounced in high-growth markets, where expectations of compounding rent growth have fallen flat or turned negative.
These conditions are forcing some investors to offload assets, creating a unique window for opportunistic buyers to enter at discounted prices. In markets like Austin, Dallas, and Phoenix—once characterized by meteoric rent increases—flattening growth has exposed vulnerabilities in underwriting assumptions.
Savvy investors are focusing on repositioning these distressed assets to align with current market realities. This trend underscores the importance of conservative underwriting and the value of stabilized assets in uncertain economic climates.
Banks Poised to Address Distress in Office Markets
Over the past 12 to 18 months, banks have been building reserves in anticipation of potential losses across the CRE spectrum, with office assets bearing the brunt of the distress. As these reserves are deployed, banks are more aggressively taking marks, resulting in an uptick in distressed sales and note dispositions.
This trend reflects an industry-wide reckoning with the ongoing transformation of office spaces. With work-from-home arrangements and hybrid models becoming entrenched, office vacancy rates remain elevated, pressuring landlords and lenders alike. Banks’ willingness to liquidate problem loans—whether through short sales or direct note sales—is a clear signal of their intent to clean up balance sheets and reposition portfolios.
Investors with an appetite for distressed assets should watch these developments closely. Acquiring office assets at a steep discount may present opportunities for conversion projects, such as transforming office spaces into residential or mixed-use properties, a strategy gaining traction in urban markets.
Growing Appetite for Common Equity Among LPs
Limited partners (LPs) are exhibiting a renewed interest in common equity investments, marking a shift from the recent preference for preferred equity structures. In low-basis suburban multifamily deals, where yields are increasingly attractive, LPs are issuing term sheets for common equity, signaling a willingness to take on more risk in exchange for higher potential returns.
This trend is fueled by a broader recalibration of investor expectations. The attractive yields in suburban markets, combined with stabilizing cap rates, are drawing capital back into equity positions. For developers and sponsors, this represents an opportunity to secure funding for new projects or recapitalize existing assets.
Multifamily Development Capital
Despite headwinds, multifamily developers are reporting renewed equity interest in starting construction on new developments in 2025. This optimism stems from demographic tailwinds and the persistent undersupply of housing in key markets. Developers are also benefiting from tighter repo pricing, which allows debt funds to reduce spreads for well-located, Tier 1 multifamily deals.
Spreads have narrowed to the high 250s to 260s basis points for Class A properties with 60-70% loan-to-cost (LTC) or loan-to-value (LTV) ratios, making financing more accessible. This has created a conducive environment for multifamily projects, particularly in markets where demand fundamentals remain strong.
Institutional Investors Returning to Bid Pools
Perhaps the most encouraging trend for 2025 is the reentry of institutional investors into bid pools for premium multifamily assets. The discount to replacement cost—a key driver of institutional interest—is closing significantly. Markets like Portland, Las Vegas, and Phoenix are among the last remaining West Coast cities where core multifamily properties can be acquired at a cap rate of 5%, albeit barely.
This trend reflects growing confidence in multifamily as an asset class capable of weathering economic volatility. For sponsors, this resurgence of institutional interest presents opportunities to secure competitive bids and attract long-term capital partners.
Strategic Implications for Stakeholders
The 2025 CRE market offers a complex but promising landscape for those prepared to adapt to evolving dynamics:
- Leverage Lending Flexibility: Borrowers should capitalize on the reopening of CRE lending channels by positioning themselves as attractive clients with strong financial profiles and deposit relationships.
- Seek Distressed Asset Opportunities: Investors with dry powder can benefit from the increased availability of distressed office and retail assets, focusing on repositioning strategies to maximize returns.
- Focus on Multifamily Resilience: Developers and sponsors should prioritize well-located multifamily projects with strong demographic fundamentals and access to affordable financing.
- Adapt to Investor Preferences: Sponsors should tailor capital structures to align with the growing appetite for common equity while maintaining flexibility to accommodate preferred equity where appropriate.
- Reimagine Office Spaces: Landlords and investors should explore creative strategies for office properties, including conversions to alternative uses or the integration of amenities that cater to hybrid work environments.
Looking Ahead: A Market in Transition
While the CRE market faces ongoing challenges—ranging from rising insurance costs to construction inflation—emerging trends suggest that 2025 could mark the beginning of a new growth cycle. By understanding the forces shaping the market and remaining agile in their strategies, stakeholders can position themselves to capitalize on the opportunities that lie ahead. Whether through opportunistic acquisitions, strategic leasing, or innovative development projects, success in 2025 will hinge on the ability to adapt to a rapidly evolving landscape.
