Commercial real estate showing resilience, despite volatile environment

Despite recent federal policy shifts creating a volatile environment, commercial real estate is continuing to show resilience, experts asserted at the 2025 CBJ Commercial Real Estate Symposium March 26. Keynote speaker Travis Deese, director of Multifamily Research with CBRE, said trade battles and lingering COVID disruptions remain a factor and the GDP may see slight pullbacks, but no drastic declines. "We will always see a pullback in GDP this year, with or without tariffs,” he said. Commercial real estate growth is expected to slow in 2025 as the Federal Reserve moves cautiously on interest rate cuts, according to CBRE. While inflation remains under control, a lagging shelter component is keeping it above target levels. “If you look at the CPI, it's still lagged and positive,” Mr. Deese said. “So if you pull out the structure component, we're sitting at 2% target, the Fed has done its job with increased interest rates…as of right now, it looks like inflation’s under control.” Meanwhile, the labor market has weakened but is showing signs of stabilization, according to CBRE’s data.

Office vacancy

Despite growth in office jobs, the amount of occupied office space remains below pre-pandemic levels, Mr. Deese said. However, office space per worker has stabilized, and net absorption is accelerating, contributing to a decline in vacancies. This has led to a modest increase in asking rents. Vacancy rates are not only stabilizing in suburban markets but also in downtown areas. Meanwhile, the tech sector is rebounding, while business and finance continue to maintain their market share.

Industrial

“The good news for industrial is (that) E-commerce is one of the biggest drivers right now,” Mr. Deese said. E-commerce sales are predicted to reach 35% of all retail sales by Q3. Mr. Deese shared some predictions for 2025 from CBRE’s head of industrial and logistics research, James Breeze: Leasing Activity

• Expected to be 5% lower than in 2024.
• Third party logistics providers will maintain market dominance, though demand from Asian 3PLs will decline.
• Renewal activity will be strong as landlords prioritize re-signing tenants from post-COVID lease expirations.

Construction and Completions

• Total completions will drop by 50%, with 200 million square feet completed in 2025.
• Average building size will be the smallest since 2019.
• Groundbreakings will increase in late 2025: 40-50 MSF per quarter in the first half of the year. 60-70 MSF per quarter in Q3 and Q4, driven by economic clarity, lower vacancies, and looser lending conditions.

Vacancy and Market Dynamics

• Vacancy rates will rise by 30-50 basis points.
• Move-outs of older properties and consolidations of post-COVID expansions will contribute to increased vacancies.
• Vacancy growth will slow compared to 2024.

Rental Rates

• Taking rents will decline by 5-8%.
• Early renewals and subleases will drive lower first-year base rents, continuing the downward trend in rental rates.

Multifamily housing

A surge in new supply helped ease the housing shortage last year, with the Midwest maintaining the lowest supply-demand imbalance, according to Mr. Deese. While multifamily construction starts continue to decline, demand remains steady. Although supply challenges persist, they are beginning to recede, and developers are focusing on areas with the highest demand. Markets with high supply levels are projected to see positive rent growth in 2025, with overall rent growth expected to recover this year. The Midwest is forecast to continue outperforming other regions next year, Mr. Deese said, calling it a “hidden secret.” “If you want consistent returns…the Midwest is the best opportunity for that,” he said.

CRE capital markets

Long-term interest rate volatility, rising operating costs, and uncertainty surrounding interest rates are the top challenges facing real estate investment in 2025, according to the U.S. Investor Intentions Survey. The survey found that 69% of investors cite elevated or volatile long-term rates as a concern, followed by higher operating costs (47%) and an uncertain interest rate outlook (26%). Multifamily remains the most targeted sector for investment, with 72% of investors favoring it, followed by industrial and logistics at 37% and retail at 27%. Investment activity in the Americas is expected to improve slightly from last year, continuing the upward trend seen in 2024, Mr. Deese said. Alternative investments are also predicted to begin recovering. Meanwhile, more than $950 billion in commercial real estate loans are set to mature in 2025, adding to market pressures. “Yes, we've had a lot of chaos and a lot of changes in the last couple months, but overall (the) commercial real estate market offers clarity,” he said.

Local growth and new developments

Five city managers and administrators comprised the panel moderated by Gold Cap Hospitality co-founder Nate Kaeding. Representing Iowa City was city manager Geoff Fruin; Coralville’s city administrator Kelly Hayworth; North Liberty city administrator Ryan Heiar; Cedar Rapids city manager Jeff Pomeranz; and Marion’s city manager Ryan Waller.

Among several topics presented were recent economic developments within the Corridor. Mr. Heiar stated that North Liberty has seen significant growth over the past four years with the construction of 300 single-family homes and 500 multi-family units. Recently, additional permits have been issued for 150 new multifamily units. “Our vacancy rate right now, I'm told, is about 4%,” he said. Marion has experienced strong growth as well. City manager Ryan Waller said in the past decade, approximately 1,500 single-family units and 4,000 multifamily units have been constructed in Marion. In the last three years, 100 single-family homes and 103 multifamily units have been added.