The U.S. commercial real estate industry continues to experience significant shifts that are reshaping various sectors. However, as the market navigates this period of transition, key trends and forecasts indicate an overall trend toward more balanced and stable conditions.
Below we look at what’s driving four key real estate submarkets: office, retail, industrial and multifamily.
The office sector is showing signs of stabilization, much in part due to many companies calling for a return to office this year, with attendance already on the rise. There is also an uptick in smaller leases serving more local tenants, as the market is seeing a preference for flexible and community-oriented spaces. Finally, there is a growing demand for medical offices, particularly due to the aging of the Baby Boomer generation, with a higher concentration of these offices in the Sunbelt states. Even with more stable office conditions, the sector can expect likely more foreclosure activity in 2025 than in previous years.
Overall, the retail sector is performing strongly, with robust demand and a focus on experiential retail and store openings hitting a new high in 2024 across the country. This segment is adapting to changing consumer preferences and the rise of e-commerce by offering unique in-store experiences.
However, there has been an uptick in store closures, at twice the level of 2023. This is not a retail downturn; rather, the market is experiencing a return to pre-pandemic levels of spending. One area that is being negatively impacted is retailers tied to the weak housing market currently in play.
Consumer spending trends have led to cautious optimism for industrial real estate. Non-retail ecommerce sales are up, and inventories are starting to build again. More goods are being distributed and stored in the supply chain; however, as imports continue to rise, the threat of additional and unpredictable tariffs make it unknown how industrial tenants will respond if the government levies more tariffs. That could cause significant headwinds for this sector.
Additionally, the industrial market, which has been a star performer in recent years, is experiencing a slowdown in certain submarkets. As home sales lag — much in part due to today’s higher mortgage interest rates — home sales remain low. This negatively impacts industrial businesses tied to home sales, such as big box home improvement stores, some of which have been closing distribution centers across country. Home sales also impact truck transportation businesses, which have been giving back space nationally. Vacancy for space is at its highest levels since the Great Recession and are concentrated in larger, big box markets.
The multifamily sector is expected to stabilize, with a gradual rise in vacancy rates. Construction has slowed for the seventh consecutive quarter, a positive sign for market health overall, although the Sunbelt region of the U.S. still has more supply than demand. Rent growth remains weak as lower priced properties hold steady, but overall demand in the multifamily market remains in line with pre-pandemic levels.
In this complex business, political and regulatory environment, there are many variables for which we can’t predict the outcome, yet will definitely impact the industry, including:
Key industry tax concerns. Many important provisions expire or are in phase-down mode stemming from the Tax Cuts & Jobs Act of 2017. These include 199A deductions, bonus depreciation, excess business loss limitations, 163(j) interest expense limitation calculations, lower individual tax rates, state and local tax deduction cap, increased standard deductions and the expanded estate exemption.
Other concerns include whether the limit on business income tax deductions could ultimately reach into property taxes for businesses — in effect minimizing key benefits of other tax provisions for those in the real estate industry. Additionally impactful to the industry, will green energy tax credits go away for projects? Carried interest also appears to be on the table, as the Trump administration announced they want to close the “carried interest loophole.” There are no details on how far reaching a change to Section 1061 would go or whether the Section 1231 gain exception to recharacterization would remain intact. A material change to this provision could have a profound impact on how promotes in real estate deals are structured.
Read “4 Tax Planning Areas Impacting Real Estate Developers in 2024 and Beyond”
Read “Key Year-End Tax Areas for Real Estate and Private Equity Funds”
Read “How to Know if Your Real Estate Entity Has Triggered an Impairment Loss”
Read “How Your Private Real Estate Fund Can Use Fair Value Reporting to Value Investments”
With mid-term elections looming and President Trump’s unfolding agenda, there are numerous unknowns that will impact the real estate industry and many taxpayers. Even while we wait for answers, overall, the U.S. commercial real estate market is navigating a period of transition with all indications of a shift toward more balanced and stable conditions.
Thank you to CoStar Group and ICSC for presenting with us on our recent national real estate market update webinar.
Contact Dave Sobochan, Adam Hill or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.