Best ways to play commercial real estate

After years of rising interest rates and speculation about accounts in the commercial property market, the sector may finally regain more momentum in 2025 – albeit at a slower pace than some had hoped for earlier this year.

“2025 is a turning point for commercial real estate investing,” Hossam Nagy, CEO of Marcus & Millichap, told me. “The market is starting to come to terms with the fact that we will not return to the lows of the previous cycle.”

He’s bullish on all major commercial real estate types thanks to job growth, steady consumption and low unemployment.

“The balance between supply and demand in CRE is the best it has been in years as construction is limited in most sectors,” Naji added.

It is important to note that much of the weakness in the commercial real estate sector has been concentrated in the office subsector. Data compiled by SMBC found that office values ​​have fallen off a cliff since the start of the pandemic, down a staggering 41% from 2020.

But the sector’s performance has begun to stabilize. Recent analysis by Alan Todd of Bank of America found that rents have stabilized from a year ago and vacancy rates are falling.

Although the Fed recently signaled two rate cuts next year instead of the four previously expected, low interest rates will still help bring about a long-awaited recovery.

The benefits will reverberate beyond office space across the larger commercial real estate sector, as lower rates mitigate refinancing risks and boost capital activity.

“A lot of capital has been raised and is ready to be deployed, and a lot of the fundamentals that underpin most types of real estate are still very strong.” PWC’s Andrew Albertstein told me.

The commercial real estate market is already showing signs of recovery amid growing optimism after two years of declining property values ​​and slowing transaction and lending activity. PWC’s Emerging Trends Survey found that nearly two-thirds of respondents expect their company’s earnings to be “good” or “excellent” in 2025, compared to just 41% last year.

Experts tell me that two areas of strength in the commercial real estate sector for the new year are data centers and retail.

“Data centers are the talk of the town. There are a lot of tailwinds and positive momentum around data centers, especially with the focus on generative AI across many aspects of the economy,” Alberstein explained. “We expect strong and continued rental growth in the data center space.”

Retail is another area that could outperform within CRE, according to Nagy, who expects record-low vacancy rates and “moderate” revenue growth.

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“Optimism and rental demand are at their highest levels in 20 years because people are returning to stores and digital brands are creating physical showrooms… it’s the darling of the industry,” Nagy explained.

For investors, this may indicate a great buying opportunity in REITs or REITs. While cheap valuations and broader structural challenges have created an attractive buying opportunity for value investors, REITs also stand out because of their high yields.

The group is required to pay 90% of its taxable income in dividends, making it an increasingly compelling option as interest rates decline on savings accounts and CDs.

UBS’ Michael Goldsmith has identified several key themes across the REIT sector through conversations with industry insiders and recent earnings reports, including expectations of declining supply pressure across the apartment, industrial, storage and single-family rental subsectors, as well as a more active transaction market. .

“Companies across REIT sub-sectors have indicated that the transaction market is reopening as seller expectations normalize and bid/ask spread closes. However, we expect this to be another area where companies offer wide ranges in their initial guidance given the unknowns.

Goldsmith sees attractive investment opportunities in self-storage, retail, industrial and cold storage, and tri-network REITs. His buying recommendations include ExtraSpace storage (the previous), Kimco Real Estate (Kim), prologis (PLD), Real Estate Income Company (Hey).

Bank of America is focusing on real estate heading into the new year, citing three factors: rising yields, attractive valuations, and that the share of real estate companies in the Standard & Poor’s Index with a quality rating of B+ or higher has doubled.

“We believe the backdrop to 2025 is positive for REIT fundamentals. “Public REITs maintain a cost of capital and access to a capital advantage over private owners, and stable interest rates may provide enough visibility to fuel transactions while narrowing the gap between buyers and sellers,” Bank of America’s Jeffrey Spector wrote in a note to clients.

Spector’s top picks for 2025 include American Healthcare REIT (Ahr), characteristics of cousins ​​(cone), and the well tower (Good), citing each company’s pricing power and earnings visibility.

Sean Smith He is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSSmith. Advice on deals, mergers, activist positions, or anything else? Email [email protected].

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