A 2025 Roadmap for Commercial Real Estate

Peering into 2025: the Commercial Real Estate Crystal Ball

Donald Rumsfeld famously reminded us, "There are known knowns; there are known unknowns; and there are also unknown unknowns." In other words, no matter how many charts, models, or expert panels we consult, surprises are inevitable. Still, we've sifted through the data to identify key trends shaping the industry in 2025. Whether you're bracing for another "known unknown" or a curveball from the "unknown unknowns," here's what the experts expect—and what they admit they might be missing.

We distlled 15 research reports for this comprehensive perspective on the CRE market in 2025. It explores key markets, promising sectors for investment, and highlights considerations for navigating the year ahead. The halcyon days of passive CRE investing may be over, but the sources maintain that the current market presents opportunities for those equipped to adapt and respond to its challenges.

The CRE market is undergoing a major transformation driven by ESG, technology, and evolving workplace dynamics. Investors are shifting towards more proactive strategies, prioritizing sustainability, data, operational expertise, and flexibility. Sectors like data centers, logistics, and residential are presenting opportunities. However, challenges remain, particularly in the office and retail sectors, where the influence of geopolitical instability, regulatory uncertainty, and climate risk must be addressed.

The CRE market is undergoing a major transformation driven by ESG, technology, and evolving workplace dynamics. Investors are shifting towards more proactive strategies, prioritizing sustainability, data, operational expertise, and flexibility. Sectors like data centers, logistics, and residential are presenting opportunities. However, challenges remain, particularly in the office and retail sectors, where the influence of geopolitical instability, regulatory uncertainty, and climate risk must be addressed.

A Slower and More Uncertain Recovery?

The quasi-consensus of diverse fortune tellers suggests CRE markets are suffering from a hangover of uncertainty. Frankly, that they still have a pulse after a pandemic, multiple wars and political upheavals is astonishing. They are however recovering more slowly than the rebound that followed the 2008 global financial crisis. 

The Evolving Role of ESG

Environmental Concerns: The real estate sector is facing increasing pressure to address climate change. Buildings without a clear path to net-zero emissions will likely struggle to secure financing, as lenders are becoming more sensitive to climate change. According to Emerging Trends interviewees;

• The climate crisis has created a need for ‘clear regulation … because it is associated with future devaluations’. 

• Property owners without a net-zero pathway for their assets will struggle to obtain finance.

Regulatory Pressures: The industry is concerned about increasing regulation, with 74% of Emerging Trends respondents citing it as a key issue. This includes the push for minimum energy efficiency standards. Deloittes ‘2025 Commercial Real Estate Outlook states: 

• Building Performance Standards (BPS) are gaining acceptance in the EU and US, prioritizing retrofits and performance thresholds for existing buildings.

• In the UK, all commercial real estate assets will need Minimum Energy Efficiency Standards of at least Grade B from 2030 onward; otherwise, owners could face restrictions in offering new leases to prospective tenants.

Financial Implications: ESG factors are directly impacting valuations. Lenders are increasingly reluctant to finance assets that aren't considered green or future-proofed, and more buildings will not be able to be refinanced due to failing to meet ESG criteria. Capital expenditures (capex) and financing requirements for the transition to net-zero will be critical factors over the next five years (Emerging Trends). Lenders are also building ESG requirements into loan structures.

Social Value: There is a need to move beyond the environmental aspects of ESG. Awareness of the social impact of real estate and the need to foster inclusive communities and promote social equity is growing. Emerging Trends notes:

• Affordable housing and access to healthcare, education and jobs is moving from ‘nice to have’ to necessary.

• Measuring social value however remains a challenge. The social aspect is being significantly developed within our business … not as a matter of reputation within the industry, but to be attractive to employees.

Technology Impact

Digital Transformation: Real Estate companies are becoming more open to technology spending in 2025 but should be strategic in their approach, avoiding quick fixes on top of legacy systems.

AI Adoption: The industry is increasingly adopting Artificial Intelligence (AI) to improve data management and streamline processes. AI is viewed as an extraordinary tool for analyzing markets and deals, with 88% a majority planning to use digital technologies to improve their business performance. As one source notes, the use of AI could free up employees’ time to work on value-add projects rather than onerous tasks.

Data Challenges: Many companies are not yet AI-ready due to a lack of structured data collection and management processes. Data readiness and security are major challenges in scaling the use of AI. This highlights a need to standardize data, ensure its accuracy, and address security and confidentiality concerns.

The Shift Towards Operational Real Estate

Operational Focus: The focus is shifting towards operational real estate, where investors leverage both the real estate and operational performance of assets to generate value. Emerging Trends respondents said:

• Operational expertise is beginning to be regarded as a generator of value. Institutional capital wants [operational] real estate, and it recognizes that it needs the access to the operational expertise that goes with it.

• Investors are increasingly leveraging the operational nature of assets as a way of enhancing returns by generating additional income and growing value.

Workforce Priorities: According to Savills, the office market is undergoing a structural shift;

• Companies are seeking workspaces that prioritize flexibility, human scale, and community to improve recruitment, retention, productivity, and purpose.

• Workspaces must be designed to prioritise flexibility, human scale and community, and consider the social benchmarks of prospective employees.

Hybrid Work: Deloitte notes that the shift to hybrid work models has impacted the office sector, leading to high vacancy rates and a demand for high-quality office spaces. Savills underscores that the need for flexible work arrangements is becoming increasingly important to workers and that landlords need to consider how to attract them back to the office.

Sector-Specific Insights

Offices: The sector still faces headwinds, though negative sentiment is overplayed. Recovering demand, scarce Grade A stock, and limited pipeline are expected to deliver real growth.

• Older office stock in non-CBD locations will remain difficult to transact in due to increased ESG scrutiny and leasing risk.

• Occupier preferences have gone “full circle” with tenants now increasing the provision of desks as well as meeting rooms.

• The sector is experiencing a K-shaped recovery, with best-in-class buildings seeing value increases and weaker assets facing further decline.

• Demand for best-in-class office space is increasing while older buildings struggle with leasing risk and stricter ESG criteria.

• Prime CBD office vacancies have remained low, with stronger rental prospects than secondary sub-markets.

Data Centres: According to PIMCO, the rise of AI is driving a global surge in demand for data centres, making them a key investment area.

• Emerging Trends suggests there is a race for power, and a huge land grab for sites with adequate power supply.

• Data centres are becoming an exit strategy for underperforming warehouses.

• The digital megatrend is expected to drive demand, though stock selection and knowledge of the technology is vital.

Residential: The residential sector is expected to perform well due to demographic shifts and supply shortages. As sector specialist in Emerging Trends noted, “Long-term and short-term fundamentals are clear. There is a demand-supply imbalance, applicable in all European cities”.

• Demand for housing is set to continue growing in major urban areas due to population growth and migration.

• The UK’s need for more homes, particularly affordable ones, is likely to grow, with a supply backlog of 4.3 million homes.

• There is strong demand in Europe for purpose-built student accommodation, driven by increased student numbers.

• Demand for rented residential properties is expected to continue, driven by urbanization, migration and affordability challenges for home ownership.

• New-build multi-family housing is expected to show strong occupancy and rental growth.

• The senior living sector also presents a long-term opportunity, with a growing demand for accommodation suitable for active seniors.

Retail: According to JLL and Capital Economics, prime high street retail is seeing improvements in rental growth and capital values, and retail warehouses are showing strong income returns.

• Mixed-use developments where combining retail and residential are a growing trend.

• The best quality shopping centres are starting to see growing occupier demand and a return to rental growth.

      Logistics: Savills cites e-commerce and the need for resilient supply chains continue to fuel demand for logistics facilities as well as an increase of interest in last-mile logistics due to the ability of AI to predict consumer needs.

Geographic Variations

The market recovery is expected to be uneven, highlighting the need to choose the right asset in the right place. There is an opportunity to take advantage of an upswing in certain markets, and potentially see the strongest performance in a decade.

Europe: Southern Europe is expected to continue its economic outperformance, driven by a strong tourism sector, lower sensitivity to energy costs, and immigration.

• Spain - Costar expects to see robust growth, with Madrid being particularly attractive due to a combination of macroeconomic and microeconomic factors and its high quality of life.

• The Netherlands - is expected to benefit from falling interest rates.

• Nordic Countries - are well-positioned to accommodate growth in the data centre market because of strong fiber networks and green energy. Their service sectors may have stronger growth potential given that they are relatively underdeveloped.

• UK - Cushman & Wakefield expect the UK is to see a major compression in yields, with the most downward movements in yield across EMEA.

• Germany - The German market faces several challenges, including regulatory issues, skills shortages, and a lack of automation. A German investor stated, “new development in leading German cities is extremely difficult and cumbersome”.

Asia-Pacific: Savills forecasts Asia-Pacific to see a significant concentration of investment and with the region expected to benefit from increasing incomes and infrastructure investments.

• Developed countries are expected to experience a cyclical upswing in 2025, driven by global demand for semiconductors and AI-related electronics.

• Japan is expected to experience higher-than-average growth due to corporate reforms and still low interest rates.

• India is one of the fastest growing investment markets in the Asia-Pacific region.

• Singapore, Japan, South Korea, and Australia - are ranked high in AI preparedness.

North America - is forecast to be the fastest-growing region in 2025, with investment expected to increase by 38%.

Challenges and Risks

• Geopolitical Instability: Geopolitical tensions, including conflicts, are a major concern, influencing investment decisions and creating market volatility. As one global investor said, “While geopolitics is very relevant for everything we do, it’s very difficult to invest against the background of that or change one’s investment behaviour”.

• Insurance Risks: Underwriting environmentally friendly materials and construction processes presents new challenges for insurers. There's a need for increased collaboration among all parties to formulate minimum standards and best practices for risk management.

• Regulatory Uncertainty: There is a lack of clarity around increasingly stringent ESG requirements. This contributes to confusion about accreditation, and uncertainty about the value upside of doing the right thing.

• Financeability: Buildings that do not meet ESG criteria may struggle to be refinanced due to EU directives regarding energy efficiency. This could create opportunities for new funds. As a senior banker observed; “We see a big issue arising from Basel IV, which makes [real estate lending] not really efficient”.

• Economic Uncertainty: There is general acknowledgement of market instability which is influencing investment decisions.

  • Heightened uncertainty around the degree and duration of interest rate cuts could mean investors need to rely more heavily on investments offering more scope for rental growth.

  • Potential for distress materializing from assets that may struggle to secure refinancing could prolong their pricing pain.

  • Increased interest rates in Japan could impact real estate values and require investors to proactively manage their loans and operational costs.

  • The UK continues to face elevated interest rates compared to European and many advanced Asian economies, leading to higher debt servicing costs.

Quotes of Note:

• “Lenders who are sensitive to the impact of climate change, speak our language, says the real estate head of a private equity firm”. (Emerging Trends in Real Estate®).

• “Whether it’s the greening of older buildings or the repurposing of offices, the role of the government is key in achieving those aims” - Alan Cheong, Executive Director of Research and Consultancy at Savills Singapore.

• “You need to be a little more proactive in anticipating these structural trends, says the real estate head of a private investment firm”. (Emerging Trends in Real Estate®).

• “Over the next 25 years, we need a much wider scale transition in the types of materials that we’re using in buildings. But that’s going to throw up more and more insurance issues.” (Emerging Trends in Real Estate).

• “For the first time in 20 years, you’ve got negative leverage. You’re borrowing at 6 percent or 7 percent, in theory buying at 5 percent, which means you’ve got to believe rental growth is going to be higher than inflation. That’s difficult to envision”. (Emerging Trends in Real Estate®).

List of Sources: (click below to access)

Capital Economics: Look to beds sheds and retail for best returns

CBRE: UK Real Estate Market Outlook 2025 The Road to Recovery

Costar: European real estate professionals cautiously optimistic for2025

Crowd Street: 4 Reasons We Believe the Future of Commercial Real Estate Looks Bright for 2025

Cushman & Wakefield: European Real Estate Market Outlook 2025

Deloitte: 2025 commercial real estate outlook

JLL: European Retail Market Outlook

Knight Frank: European Commercial Outlook 2025

M&G Investments: Global Real Estate Outlook 2025

Netguru: What will commercial real estate look like in 2030.pdf

PIMCO: Real Estate Outlook:

Savills: Global real estate investment 2025 and beyond

Savills: European Office Outlook 2025

ULI |PWC: Emerging Trends-2025

Urban Land Magazine: Optimism and Excitement at 2024 McCoy Symposium