Poised for growth
2025 INSIDE REAL ESTATE OUTLOOK
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January 2025
Overview
Macroeconomic and CRE outlook
The odds of a recession have largely diminished, and the global economy appears well-positioned to sustain its expansion as inflation eases and central banks adopt more accommodative policies.
Global labor markets and corporate balance sheets have weathered the challenges of inflation and higher interest rates. Absent an exogenous shock, we anticipate smoother sailing ahead in 2025.
Commercial real estate values have largely adjusted for the current cycle, setting the stage for a turning point in early 2025. However, we remain cautious about the office sector and see the greatest opportunities in structurally-driven property types over the next 12 months.
From 2025 onward, we expect a range of opportunities to emerge as investors regain confidence in a stable economy and gain greater clarity on capital costs and pricing.
Capitalizing on an emerging recovery
Real estate debt remains one of our highest conviction strategies in 2025 given its premium to core equity and need for capital to offset an elevated maturity schedule.
Listed REITs may offer emerging opportunities given stronger sustained economic growth.
Private equity markets have signaled a bottom for most sectors, and we expect stabilized to modest capital values amid increased debt issuance among private lenders.
Structurally-driven sectors, such as data centers, logistics, and residential, remain well-positioned to take advantage of increased investor activity in 2025. We continue to recommend selectively adding these sectors to portfolios across all four real estate quadrants.
MACROeconomic overview
Economic stability could be on the horizon for many nations
Investors should price in sustained growth in 2025
North America
The European economy remains caught between recovery and stagnation. Although moderating inflationary pressures and easing monetary policy will provide some relief, these may not be sufficient to reignite a solid economic growth trajectory.
Indeed, forward-looking indicators point to sluggish and fragile performance for 2025, amid a continued contraction in industrial activity, political uncertainty in Germany and France that may defer investment decisions, and the need for fiscal consolidation after excess spending during the pandemic and energy crises.
Southern European countries, excluding Italy, are expected to outperform, driven by service, tourism, and foreign investment inflow.
Asia-Pacific economies are outperforming many others, particularly developed nations, with exports serving as a key growth driver. However, export performance has been uneven. Lower inflation and appreciating currencies provide optimism, though growth may face headwinds in 2025.
China remains a weak spot in the region. While fiscal stimulus could offer some support, flat export growth and sustained economic challenges may continue to weigh on the broader regional outlook.
Furthermore, the prospect of increased U.S. tariffs presents a potential headwind to growth.
The U.S. economy exceeded expectations in 2024 and enters 2025 on solid footing. While job growth has slowed, the labor market remains resilient, with unemployment hovering near generational lows.
The Federal Open Market Committee (FOMC) has acknowledged that, as the inflation rate is moving closer to its target, it can now focus on full employment.
Although risks to growth persist—stemming from potentially problematic trade policies following the presidential election and ongoing geopolitical conflicts—the U.S. economy is better equipped to weather unexpected headwinds than it was a year ago.
Europe
Asia Pacific
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sector opportunities
State of the commercial real estate sectors
United States
strategic outlook
Another good year to be a lender, but equity is on the rise
Four quadrant outlook
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Private Equity
Core, Value-add, and
Opportunities
summary: A better year ahead in 2025
Taking advantage of an improved investment landscape
01
A disappointing 2024 gives way to opportunity in 2025
While 2025 is expected to offer continued opportunities in the debt market, a more favorable capital markets environment bodes well for equity investors capitalizing on the decline in capital values since 2022. Lower capital costs and a more accommodative policy are also providing investors with improved clarity on pricing.
02
We remain focused on sectors that benefit from strong secular tailwinds
Data centers, logistics, and residential sectors remain our top choices for 2025. These sectors continue to be underserved and exhibit strong underlying demand, which we believe will enhance portfolio performance.
03
A better year for real estate in 2025
We are at the end of real estate’s corrective phase, which we believe will make 2025 a highly attractive vintage for investors. Quality and sector selection will remain key focus areas over the next 12 months for investors looking to capitalize on the nascent recovery.
We believe real estate debt offers compelling absolute and relative value making it our pick for preserving capital values while generating income over the short-term. With rates peaking and values expected to trough in the next six months, we will increasingly focus on the public and private equity real estate quadrants as means of gaining exposure.
The global economy is finely balanced with the push of higher interest rates colliding against the pull of strong labor markets.
We continue to place a high probability of a modest recession within developed markets but are open to the prospect of a "soft landing."
Real estate values are likely to remain under pressure due to elevated credit costs.. However, structurally-driven property types are expected to remain better protected.
We expect an array of opportunities to present themselves from 2024 onwards once repricing is largely complete.
Real estate debt remains our highest conviction idea given its strong relative value and the premium it offers to core equity.
We remain on watch for emerging opportunities in listed REITs if the economy were to head towards a "soft landing" scenario.
We expect private real estate opportunities to emerge in 2H 2024 once repricing is largely complete and debt markets are more accommodating.
Our conviction on structurally-driven property types (data centers, logistics, and residential) remains steadfast and we continue to advocate selective adds across all quadrants.
Learn more about the sector opportunities.
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OVERVIEW
We feel that the long-awaited turning point has arrived
Upgrading our outlook for CRE Equity
Attractive
key themes shaping the markets
Structural themes will drive divergence and returns differentials
Income growth is likely to be the primary driver of total returns in the coming year. As such, understanding the factors influencing real estate supply and demand fundamentals is critical.
We have identified several key themes that investors should closely monitor throughout the next year (highlighted in green in the exhibit). These themes have the potential to significantly impact various sectors and geographies, driving divergence and return differentials across the real estate landscape.
By focusing on these trends, investors can position themselves to capitalize on opportunities and navigate potential risks.
Structural themes impacting real estate
World, 2025
Macroeconomics
Inflation
Monetary policy
Fiscal policy
geopolitics
Regional conflicts
Tariffs
U.S. election
decarbonization
Energy security
Green transition
Obsolescence
technology
AI
Internet of Things (IoT)
Remote working
demographics
Migration
Tourism
Key themes
Repricing is largely complete, positioning 2025 as a promising vintage year with emerging opportunities across most investment strategies.
Investors are likely to focus on sectors with strong structural drivers and recovery potentials.
Improving
Stable
Deteriorating
Challenged
Mobility
Aging
Data Centers
The sector remains one of the most sought after by investors due to robust demand drivers.
Retail
Productive outlook due to lack of development and resolute consumer base. Value-oriented assets provide stability through periods of economic uncertainty.
Residential
Overdevelopment in some segments in being eroded, and housing remains underserved across the broader spectrum.
Industrial
Despite pockets of weakness, demand has rebounded. Supply chain reconfiguration and e-commerce should support long-term demand.
Data Centers
It is the sector with the brightest outlook owing to structural supply-demand imbalance.
Residential
Values turned positive in Q2 2024, after a peak-to-trough decline of 14%. Limited availability and affordability pressure support the sector.
Industrial
Supply is relatively tight, while demand is shifting towards modern, energy-efficient assets.
Hotel
The sector benefits from higher investor sentiment, buoyant tourism, and increasing business travel demand.
Healthcare
Improving fundamentals highlighting the sector's underserved nature. A shortage of skilled labor remains a primary headwind.
Student housing
Healthy fundamentals are counterbalanced by increasing new supply and uncertain enrollment trends.
Life sciences
A weak phase in the VC cycle following the pandemic coupled with over-supply is creating stress for the sector.
Office
Improvements in fundamentals are evident, but negative effective rents point to a difficult operating environment.
Retail
Weak outlook owing to a precarious political and economic environment, particularly in Germany and France.
Student housing
The UK market commands some caution in the short term until the impact of the new student visa rule is fully understood.
Healthcare
Ongoing challenges include a shortage of workers, a lack of funding, and operators' financial pressure.
Office
The outlook and sentiment remain weak. The sector is likely to lag the other property types.
Market
Real GDP growth in selected economies
2023
2024e
2025f
2.9
1.5
0.4
-0.3
0.9
1.5
2.1
5.2
2.7
1.1
0.9
-0.1
1.1
-0.2
1.2
4.8
2.1
1.8
1.5
0.7
0.9
1.2
2.0
4.5
Public Equity
REITs
Improving fundamentals and favorable sector exposure create a supportive environment.
Valuations are buoyed by recovering prices, particularly in sectors with exposure to emerging growth themes.
Private Debt
Senior
Subordinate
Persistently elevated rates maintain pricing attractiveness relative to other risk assets.
Limited distress mitigates downside risks, while heightened maturities are expected to unlock opportunities across a broad spectrum of strategies.
Public Debt
CMBS
Despite lingering risks tied to office sector exposure, other sectors remain balanced.
Public debt continues to be reasonably priced for current valuations, offering favorable pricing relative to corporate bonds.
“Know what you own
and why you own it.”
Peter Lynch
Source: Bloomberg, Principal Real Estate, December 2024. e = estimate, f = forecast
Percentage, historical and forecasts
High conviction opportunities
KEY
Sectors in neutral
Sectors warranting caution
Download the full report to get our detailed 2025 outlook for real estate.
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Get in touch
contactrealestate@principal.com
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Macroeconomics and commercial real estate (CRE) prospects
Europe
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2025 INSIDE REAL ESTATE OUTLOOK
World, 2025
World, 2025
Macroeconomics
Inflation
Monetary policy
Fiscal policy
Macroeconomics
Inflation
Monetary policy
Fiscal policy
GEOPOLITICS
Regional conflicts
Tariffs
U.S. election
TECHNOLOGY
Artificial Intelligence (AI)
Internet of Things (IoT)
Remote working
Mobility
MACROeconomic overview
Economic stability could be on the horizon for many nations
Investors should price in sustained growth in 2025
We believe real estate debt offers compelling absolute and relative value making it our pick for preserving capital values while generating income over the short-term. With rates peaking and values expected to trough in the next six months, we will increasingly focus on the public and private equity real estate quadrants as means of gaining exposure.
Four quadrant outlook
Upgrading our outlook for CRE Equity
Attractive
Improving
Attractive
Improving
Stable
Private Equity
Private Equity
Private Equity
Core, Value-add
and Opportunites
Repricing is largely complete, positioning 2025 as a promising vintage year with emerging opportunities across most investment strategies. Investors are likely to focus on sectors with strong structural drivers and recovery potential.
Public Equity
REITs
Improving fundamentals and favorable sector exposure create a supportive environment. Valuations are buoyed by recovering prices, particularly in sectors with exposure to emerging growth themes.
Private Debt
Senior
Subordinate
Persistently elevated rates maintain pricing attractiveness relative to other risk assets. Limited distress mitigates downside risks, while heightened maturities are expected to unlock opportunities across a broad spectrum of strategies.
"Know what you own
and why you own it."
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Economic growth remains healthy heading into 2024, but headwinds abound.
Inflation is not yet within the Federal Open Market Committee’s (FOMC) prescribed target.
Policy pause as inflation cools, but a higher rate environment presents challenges.
Consumers are struggling to maintain spending as balance sheets adjust to post-stimulus norms.
Housing has stalled due to record-low affordability, which presents significant challenges to headline economic growth.
Economic growth has stalled and is expected to remain flat in the first half of the year as the full impact of tighter financial conditions continues to pass through.
Inflation has come down sharply below three percent but the last mile toward the target may be bumpy as the energy price cap is phased out and subsidies are reduced.
Policymakers remain cautious regarding easing base rates, but their attention should shift from inflation risk to economic and financial risks.
Forward-looking economic indicators are in contraction territory, including business activity, consumer confidence, and lending demand.
Economic growth remains muted as China, Japan, and Australia are expanding below potential.
Easing inflation has effectively ended the interest rate hiking cycle with the potential exception of Japan.
Exports are arguably the strength of most APAC economies but have declined over the past year. This remains the most prominent headwind to growth.
A growth recession is in the offing for 2024.
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Market
2023
2024e
2025f
2023
2024e
2025f
2.9
2.6
1.8
1.3
1.1
1.8
0.4
1.0
1.3
-0.3
0.0
0.8
0.9
1.1
1.8
1.7
0.0
1.2
2.0
1.2
2.1
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STRATEGIC OUTLOOK
Another good year to be a lender, but equity is on the rise
Data Centers
The sector remains one of the most sought after by investors due to robust demand drivers.
Data Centers
The sector remains one of the most sought after by investors due to robust demand drivers.
Residential
Overdevelopment in some segments is being eroded, and housing remains underserved across the broader spectrum.
Industrial
Despite pockets of weakness, demand has rebounded. Supply chain reconfiguration and e-commerce should support long-term demand.
Retail
Productive outlook due to lack of development and resolute consumer base. Value-oriented assets provide stability through periods of economic uncertainty.
Healthcare
Improving fundamentals highlight the sector's underserved nature. A shortage of skilled labor remains a primary headwind.
Student Housing
Healthy fundamentals are counterbalanced by increasing new supply and uncertain enrollment trends.
United States
Life Sciences
A weak phase in the VC cycle following the pandemic coupled with over-supply is creating stress for the sector.
Office
Improvements in fundamentals are evident, but negative effective rents point to a difficult operating environment.
Healthcare
Improving fundamentals highlight the sector's underserved nature. A shortage of skilled labor remains a primary headwind.
Student Housing
Healthy fundamentals are counterbalanced by increasing new supply and uncertain enrollment trends.
Industrial
Despite pockets of weakness, demand has rebounded. Supply chain reconfiguration and e-commerce should support long-term demand.
Retail
Productive outlook due to lack of development and resolute consumer base. Value-oriented assets provide stability through periods of economic uncertainty.
Data Centers
The sector remains one of the most sought after by investors due to robust demand drivers.
Residential
Overdevelopment in some segments is being eroded, and housing remains underserved across the broader spectrum.
01
We expect 2024 to be a transition year and one of two halves
We believe debt opportunities will remain more attractive in the first half of 2024 offering strong absolute and risk-adjusted returns. The second half is where we expect listed and private equity to re-emerge from a two-year winter and start to present select opportunities.
SECTOR OPPORTUNITIES
State of commercial real estate sectors
01
A disappointing 2024 gives way to opportunity in 2025
While 2025 is expected to offer continued opportunities in the debt market, a more favorable capital markets environment bodes well for equity investors capitalizing on the decline in capital values since 2022. Lower capital costs and a more accommodative policy are also providing investors with improved clarity on pricing.
02
We remain focused on sectors that benefit from strong secular tailwinds
Data centers, logistics, and residential sectors remain our top choices for 2025. These sectors continue to be underserved and exhibit strong underlying demand, which we believe will enhance portfolio performance.
Download the full report to get our detailed 2025 outlook for real estate.
Get in touch.
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