The Big Picture 2025: Commercial Real Estate

The commercial real estate (CRE) market is undergoing significant shifts as it adjusts to economic pressures and evolving tenant needs. With rising interest rates, increasing loan delinquencies, and growing demand for modernized spaces, 2025 presents both challenges and opportunities. Navigating this landscape will require businesses to reassess their strategies and approach these changes differently to remain competitive.

Loan delinquencies are a growing concern in the CRE market. By the second quarter of 2024, delinquencies on nonowner-occupied CRE loans had risen to 2.03%, compared to 1.16% during the same period in 2023. This trend is particularly notable in the office sector, where approximately 10% of the $950 billion in CRE loans set to mature in 2024 are linked to office properties. As these loans mature, the risk of defaults may lead to forced sales and restructuring, which could impact valuations in a market that has seen limited price changes in recent years.

Interest rates remain another critical factor affecting the industry. The average rate on loans originated in 2024 reached 6.2%, significantly higher than the 4.3% average for loans maturing during the same period. This nearly 200-basis-point increase has added substantial financial pressure on borrowers, particularly as they contend with the large volume of maturing CRE mortgages.

Tenant preferences are also driving change in the market, especially within the office sector. A clear divide is emerging between high-quality, well-maintained properties and older, less competitive buildings. Tenants are placing greater emphasis on landlords' ability to invest in property improvements and maintain financial stability. In response, many landlords are reevaluating their leasing strategies and upgrading assets to remain competitive in an environment where tenants are becoming more selective.

As the commercial real estate sector moves further into 2025, adapting to these financial and market shifts will be essential. Stakeholders must address the challenges posed by rising costs and changing tenant expectations while identifying opportunities for growth through strategic investments and operational adjustments.