A look at 2025 real estate markets
By : J. David Chapman/December 19, 2024
As we approach Christmas, we are making a list and checking it twice—only our list, unlike the Man with the Bag, is focused on real estate issues and worries. The real estate market in 2025 faces numerous challenges across both residential and commercial sectors, driven by economic, political, and environmental factors.
Despite recent declines, financing costs are expected to remain high in 2025. Elevated interest rates will likely keep many potential buyers on the sidelines, awaiting distressed asset sales driven by upcoming loan maturities. Approximately $1.8 trillion in commercial real estate loans will mature by 2026. While lenders have been extending deadlines, regulatory constraints and capital shortages may soon limit this flexibility, impacting refinancing options, and forcing the sale of some assets to satisfy loan demands.
Global conflicts, such as those in Ukraine and Gaza, contribute to supply chain disruptions, inflation, and consumer confidence. These factors, combined with higher risk assessments by investors, are driving elevated cap rates. Appraisers are encountering challenges in obtaining the valuations needed by lenders to finance projects for developers. This lack of financing could slow development in the coming year.
The effects of extreme weather events continue to strain the market. Property owners and insurance companies have endured massive economic losses, leading to soaring premiums. To mitigate these costs, property owners are exploring alternative risk management strategies sometimes leaving buildings vulnerable to future risks. There is an urgent need for research and development in resilient and sustainable building practices in the U.S. to reduce the risk for both the insurer and the insured.
Housing affordability remains a critical issue, exacerbated by a 4.4-million-unit inventory shortage and rising rents. Over half of renters are now cost-burdened, spending more than 30% of their income on housing. While new construction is increasing, it is concentrated in major metropolitan areas and falls short of meeting demand.
Office vacancy rates are nearing 20% in the U.S., straining finances of building owners and others in the sector. Developers are pursuing adaptive reuse of office spaces into housing, healthcare, or educational facilities. Though costly and complex, these conversions offer opportunities to revitalize urban centers and address housing shortages.
These challenges present significant hurdles, but also opportunities. The real estate industry is resilient, and our practitioners are persistent. Locally, we will innovate, invest in emerging markets, and capitalize on being a secondary city – all of which will offer higher returns.
J. David Chapman, Ph.D., is professor of finance & real estate at the University of Central Oklahoma (jchapman7@uco.edu).