Commercial Real Estate Market Report: Q1 2025

Key takeaways

• Multifamily housing: The first quarter started out strong for the U.S. multifamily market, with 1% year-over-year rental growth. With homeownership becoming more challenging due to high costs of home ownership, more people are turning to renting. The sector's vacancy trend may have already peaked. With fewer new units coming online this year, it’s possible to see a reduction in rental concessions, which is good news for landlords. 
• Office: Is the office sector nearing a bottom? Probably yes, since the office sector has continued its slow but measured recovery in the first quarter. There is a growing market consensus that after five challenging years, office may finally be ready to turn the corner from the severe disruption of the pandemic. However, looming threats on the horizon like growing uncertainty about potential trade war, fears of a possible recession and increasing distress in commercial mortgage-backed securities (CMBS) loans could nip the office sector’s recovery in the bud.   
• Retail: Marking the weakest performance since the beginning of the pandemic, retail demand shifted into negative territory, with net absorption falling by 5.9 million square feet in the first quarter. If the current economic uncertainty persists, it will likely lead to more conservative leasing strategies in the coming quarters, pushing vacancy rates higher and slowing rent growth. In contrast to the growing financial stress faced by many traditional retailers, value-oriented chains are doubling down on expansion. Unless the economy slips into a recession, the retail market should navigate this uncertainty with relatively minor disruptions to market fundamentals.
• Industrial: The industrial sector is undergoing a period of adjustment, with net absorption slowing to 170.8 million square feet in 2024. Rent growth was steady in key markets due to limited new construction and ongoing demand in key logistics hubs. High-value transactions remained consistent and industrial REITs rebounded early in the year, reflecting renewed investor confidence amid easing interest rates. Nonetheless, the long-term outlook remains stable.
• Capital markets: The borrowing environment at the end of the first quarter was not significantly different than at the conclusion of 2024. However, the activity indicated that investor confidence was growing in the direction and stability of lending markets. Equity capital remains available to fund deals, but we will be watching closely to see if the broader volatility dampens enthusiasm for commercial real estate deal making.
• Tariff impacts on key real estate sectors: Tariffs may lead to higher costs for construction materials in the multifamily asset class, thereby increasing overall development and renovation expenses. Though changes to trade policy may have a more significant impact on other sectors, the resulting economic uncertainty could negatively affect investment climate and office-using job growth, ultimately hindering the recovery of the office sector. Rapidly implemented tariffs on imported goods are already challenging the retail sector by increasing input costs, pressuring margins and raising prices for consumers. Recent tariffs on imports from major trading partners may pose future challenges for the industrial sector by increasing construction costs and disrupting supply chains, but also increased demand for warehouse space as third-party logistics providers increased their supply of imports ahead of tariff deadlines.

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