In a recent episode of America’s Commercial Real Estate Show the show host sat down with Jim Costello, seasoned economist from MSCI where he co-heads the real-assets research team with responsibility for the Americas, to unpack the state of commercial real estate as we move through 2025. The conversation offered a deep dive into transaction volumes, sector-specific dynamics, distress scenarios, and where opportunities may lie in the year ahead. Here’s a breakdown of the key takeaways from their insightful discussion.
Transaction Volume: A Modest Recovery in Motion
After several sluggish years, transaction volume saw a 9% year-over-year increase in 2024. This uptick, while encouraging, still leaves activity below the pandemic-era peaks of 2021 and 2022. Costello noted that the market is stabilizing, with less panic and more strategic decision-making. Gone are the days of ultra-low interest rates that fueled a frenzy; today’s deals are more measured and income-driven.
Costello emphasized that investors can no longer wait for “better times.” The market has accepted higher interest rates as the new normal, and property owners are increasingly motivated to act—either to capture gains or to preempt forced sales in tougher conditions.
Distressed Assets: A Different Kind of Trouble
Unlike the financial crisis of 2008, where distressed assets often stemmed from overleveraged deals, today’s distress is largely fundamental. We’re talking about obsolete malls, outdated office buildings, and assets with systemic performance issues—not just bad debt structures. As Costello explained, this wave of distress requires hands-on local expertise and redevelopment strategies, not just capital.
Rather than big institutional players sweeping in, the buyers of these distressed assets tend to be local developers and owner-operators—people who understand zoning boards and know how to swing a hammer. They’re the ones best positioned to navigate the complexity and breathe new life into struggling properties.
Sector Spotlights: Office, Industrial, Multifamily & More
🏢 Office: The Tale of Two Markets
The office sector continues to face challenges, especially in aging urban buildings with outdated systems and layouts. Yet, there’s growing activity, especially in Manhattan, where prices have dropped over 50%, drawing in local investors and private capital. Interestingly, suburban offices are outperforming CBDs in some metrics, a reversal from historical norms. High-quality, amenitized suburban assets are proving more attractive in a hybrid work era.
🏭 Industrial: Still Strong, But Cooling
Industrial remains a high-performing asset class, with pricing growth continuing—albeit at a slower pace. The sector benefitted immensely from the e-commerce boom, but supply has caught up. Costello dismissed concerns of overbuilding, noting the shorter development timelines make it easier to adjust supply in real time.
🏘️ Multifamily: Underbuilt, But Watch Regulations
Multifamily deal volume is rebounding, and while cap rates are rising from their lows, the sector remains fundamentally sound. However, regulatory burdens and development restrictions in many cities could limit new supply—fueling political pressures for rent control. Costello urged for more balanced regulation to avoid under- or over-supply extremes.
🏨 Hotels: Slowly Recovering, Unevenly
Hotels are bouncing back from a dual shock: a 2019 financing crisis and COVID-19 shutdowns. While leisure travel surged in 2022, pricing remains below pre-pandemic peaks, particularly in convention-driven urban markets. However, tighter regulations on short-term rentals may provide a tailwind for traditional hotels.
🏥 Medical Office: A Predictable Performer
With aging demographics driving healthcare demand, medical office properties remain a favorite among investors. Still, Costello warns to consider what happens when the Baby Boomer wave subsides and future generations offer less predictable demand.
Lending Environment: Turning a Corner
The lending market is slowly thawing. Non-bank lenders led the initial recovery, but traditional banks are beginning to re-enter as they work through legacy assets. Costello noted that loans made at today’s lower prices and conservative LTVs could end up being some of the safest and most profitable loans in recent memory—echoing post-GFC trends.
Opportunities Ahead: Think Local, Think Long-Term
Costello pointed out that the best opportunities may come from local knowledge and long-term vision. Whether it’s repositioning distressed office buildings or navigating suburban growth corridors, investors who understand local dynamics and are willing to get hands-on will have the edge.
One wildcard to watch: potential new federal Opportunity Zone legislation. If renewed or expanded under the current administration, it could reignite development interest in underserved areas.
Final Thoughts: Where Are We in the Cycle?
While the exact point in the cycle varies by sector and region, Costello believes the market is at or near the bottom—possibly just beginning to rebound. Prices have largely reset, the panic phase has passed, and more investors are stepping back in. Still, success in 2025 and beyond will require nuanced strategies, adaptability, and a willingness to break from past playbooks.
As the host of the show put it, “The only constant in this world is change.” And in commercial real estate, that change is where the next wave of opportunity lives.