2025 Real Estate Outlook
The story of the real estate market in 2024, both for residential and most commercial sectors, was one of stagnation and sluggishness, waiting for mortgage rate cuts that never really materialized. Housing prices rose slowly as a lot of new supply entered the market, but construction rates slowed significantly, pointing to lowered supply across the board in the coming years. There will still be plenty of good opportunities in 2025 across sectors for investors to get exposure to real estate.
Mortgage Rates
Mortgage rates are one of the most important factors in the health of the real estate market, both residential and commercial. Though rates went up in the summer and fell in the fall, they ended the year where they started - in the mid 6% range, the highest they’ve been since the late 2000s. There was hope that the Fed’s interest rate cuts would lead to lower rates, but higher 10-year Treasury yields, which are highly correlated with mortgage rates, dampened those hopes.
Looking ahead to 2025, most projections see a slight drop by the end of next year, but rates are still expected to be in the high 5s to low 6s. The Fed is unlikely to pursue aggressive rate cuts, particularly if inflation continues to be a nuisance.
Residential
U.S. home values kept growing in 2024, but at a slower rate than in previous years. The Case-Shiller Home Price Index and the FHFA Home Price Index both grew by 4.4% in 2024, compared to the 6.2% growth rate in 2023 for both.
A number of publications have made their predictions for 2025, with the average coming in at 2.6%. In total, it seems that 2025 will see a further slowdown in home price growth, as the market continues to stagnate.
Regionally, price appreciation has been strongest in the Midwest and Northeast, while the West and much of the Sun Belt, particularly Texas and Florida, has struggled. Expect these trends to continue into 2025, as supply growth was particularly strong in the Sun Belt the past year, and Florida faces ongoing climate and insurance concerns.
Home Sales
Existing-home sales are projected to hit around 4 million in 2024, a slight decrease from 2023’s 4.1 million figure, but not a meaningful drop. New home sales hit a two-year low in October, but on a yearly basis, 2024 will come in similar to 2022 and 2023.
For 2025, most experts expect more market activity, with an average forecast of 9% growth in existing home sales over 2024. The 4.5 million average projection still puts it lower than any year since 2011 besides the past two, indicating a market that is expected to see much less activity than the norm. For new homes, NAR projects an 11% growth in sales.
Construction/Supply
Housing completions rose in 2024, hitting a 14.6% year-over-year growth rate in September. Still, there is an acute and persistent housing shortage in the country, with Freddie Mac estimating a current deficit of 3.7 million units. While completions were up, housing starts fell as the year progressed, dipping to 5-year lows. Fannie Mae expects housing starts to decline by 5% in total in 2024 and to drop another 1.4% in 2025. This points to a decrease in supply growth in the next few years.
Incoming President Trump’s policies could also play a factor. There is some hope that deregulation will lead to more new home construction, and homebuilder confidence recently hit its highest mark since April. On the other hand, both Trump’s proposed mass deportation plan and proposed tariffs are likely to negatively affect the construction industry if they are implemented, bringing about labor shortages and increased costs, which could lead to further decreases in the rate of construction.
Commercial
The Green Street Commercial Property Price Index (CPPI), a catch-all index for commercial real estate, rose by 4.8% through December after falling nearly 20% between January 2022 and January 2024. It does appear as if prices across sectors have hit bottom and should continue recovering in 2025.
Multifamily
Nationwide, apartment rents rose modestly in 2024, with Zillow pegging the growth rate at 3.3%, but RealPage putting it at just 0.4%. This was largely due to the 50-year high in multifamily completions, which led to a 50-year high in supply, keeping rents down despite strong demand for apartments. There are certainly regional differences, with the Sun Belt, and Texas in particular, seeing a glut of new construction that led to declining rents. However, multifamily starts fell as the year went on, indicating that there will be a further supply shortage in the coming years.
For 2025, Realtor.com is projecting a 0.1% decline in asking rents and Redfin expects asking rents to be flat year-over-year. CoStar expects rents to rise in the coming years, due in part to a declining rate of added supply. Unsurprisingly, regions that saw the least construction, particularly in Northeast and Midwest urban centers, are expected to see the highest rent growth.
Office
By far the sector that was hardest hit by the pandemic, office properties were irreparably changed by the rise of remote work. There was a gradual shift back to in-person work in 2024, and there was a positive rate of net absorption for the first time in over two years. Office building construction has fallen to a ten-year low. Still, nearly 20% of offices are vacant, and property values have dropped by an estimated 40% since their peak.
Building owners have started converting traditional offices into co-working spaces, which are growing in popularity, and into residential projects. Expect more office-to-residential conversions in 2025 and beyond, as cities look to revitalize their urban centers. This will cut into supply, but until demand for office space increases meaningfully, the sector will continue to struggle.
High mortgage rates have made refinancing difficult, and almost $1.9 trillion of commercial debt is set to mature by the end of 2026. Many office properties may be underwater, meaning the existing debt is greater than the building’s value, so there could be opportunities for investors targeting distressed assets.
Industrial
Industrial real estate has been the hottest sector in commercial real estate over the past few years, with high demand for buildings that service the tech industry, such as data centers and server farms, and that service the online shopping ecosystem, such as warehouses and distribution centers. However, the supply boom that started with increased construction in 2022 has cooled rent growth, dropping 3% year-over-year, while vacancies also rose to 6.8%.
However, industrial completions fell to their lowest rate since early 2022, indicating that demand may soon outstrip supply again as soon as 2025. Deloitte’s global real estate outlook survey placed all three industrial subsectors in the top four areas with the best opportunity for real estate investors in the next 12-18 months.
Retail
Somewhat surprisingly, in the age of online shopping, retail real estate had a strong 2024, with vacancy rates hitting their lowest level in 20 years. Supply has been tight, and retail completions are at a ten-year low, due in large part to the rising costs of construction. Demand continues to grow as the economy remains strong and consumer spending is growing at the fastest rate since early 2023. Because of the lack of new construction, expect retail to have a strong 2025 as long as the economy stays steady.
Hospitality
The hospitality sector has had a strong post-pandemic rebound the past few years, with steady occupancy rates, and growing average daily rates and revenue per available room. A stronger economy has led to an all-time high in vacation spending and business travel in the U.S. This is expected to carry over to 2025, particularly if the economy stays strong and employment rates remain stable. Investors should feel confident about pursuing opportunities in the sector, both in traditional hotels and in short-term and vacation rentals.
Takeaway
Though prices and rents have been growing slowly, and mortgage rates are not likely to drop significantly anytime soon, there are bound to be a plethora of opportunities across different sectors and different markets this year. The imminent supply crunch is likely to push rents and property values up, so investors who have sat on the sidelines waiting for mortgage rates to drop might want to get back into the game in 2025.
