The Return to Normalcy: CRE's Path Forward in 2025

The 46th edition of PWC and the Urban Land Institute’s report on emerging trends in real estate depicts an industry that is slowly returning to some form of normality after the sharp jolts and shifts in usage brought on by the Covid pandemic. “Investors’ focus is swinging to the more normal cyclical changes that occur over the course of business cycles,” the report commented.

The comprehensive piece covers virtually all segments of the industry, including many of the new technologies that are reshaping both the nature of what is being built and the business processes like PropTech that professionals can use to improve efficiency. It is based on interviews and survey responses from almost 2,000 industry experts.

“We are trying to think about what is coming next and what folks should have top of mind,” said Andrew Alperstein, partner in PwC’s financial markets and real estate group. The report also draws attention to up-and-coming sectors like data centers as well as others that are gaining new prominence as demographics change.

“It is clear that momentum has started to shift pretty broadly, driven by the Fed indicating through rate cuts that inflation is somewhat under control,” Alperstein said. “Significant capital is being raised and deployed and looking for investable opportunities. The availability of debt and equity and the confidence to deploy it has certainly improved from last year and we expect that 2025 will look better.” He anticipated that more debt would become available in the form of CMBS and debt funds for acquisition and financing.

Even though uncertainty about the economy and the state of the industry remains, the report found that more consensus is emerging on key financial metrics, suggesting the likelihood of more transactions, refinancing, and market activity.

Still, sales have fallen in every major property type, with office sales down more than 60% compared to their pre-pandemic average. Alperstein noted that the office sector is being painted with a broad brush as troubled, even though he said some office properties are doing very well.

“Cap rates have increased over recent years. The expectation is that we will see them moderate and potentially come down over the coming year, but that will vary across property types and geographies,” he said. Another hopeful sign is that prices – except for office – are no longer falling, and price stability could encourage more investors to re-enter the market, especially for better quality assets. However, prices are still far below their peak.

The report found that the estimated $1.2 trillion of CRE debt estimated to mature in the next two years does not appear to be a top concern for industry participants. It noted that the practice of “extend and pretend” appears to be working for many lenders and owners. Delinquencies are far fewer than during the global financial crisis of 2007 to 2008 and, according to one respondent, are not likely to peak for four or five years.

Alperstein sees extension and pretend as the effect of limited transactional activity. “It is hard for valuation, hard for borrowers and lenders to make decisions, so they continue to extend loans and provide more time for market transparency in order to develop an asset plan. When we expect stability in rates and more transparency on values, that will allow for extended loans to get paid off or refinanced with more confidence in the underlying value of the collateral.”

“On the buy side, there’s a lot of money that needs to get into real estate because the stock market has been so buoyant,” one respondent commented. “It is the denominator effect,” Alperstein explained. “If other assets go up in value, it tends to lead to a higher real estate commitment by investors as they try to maintain an asset allocation balance.”

The report paid particular attention to data centers, which it said are on a path to being one of the largest property types in the country over the next 10 years. Demand greatly exceeds the market’s ability to deliver new space, especially in view of the centers’ massive power needs and space requirements. Cost is also a major factor – around $12.5 million per megawatt.

“The trends around data centers are inescapable in terms of demand driven by generative AI and other uses,” Alperstein said, adding there is much still to be learned about the industry. “Where does the new development happen, who are the players, developers and lenders, and longer term, what does the subsector look like? What is the risk of obsolescence? We don’t have a lot of data on how it behaves.”

Another evolving development for which more data is needed is “smart growth” in the industrial sector to optimize supply chains and circumvent disruption. Power and water supplies are key ingredients for new modern facilities that are highly automated and energy-dependent. “With onshoring and advanced manufacturing, businesses are creating a sub-product within industrial that has not been well-developed and built out,” Alperstein said.

“We are watching closely not just the macro trend, but whether it will drive landlords and developers to different markets because of access to labor, land and regulatory developments.”