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Green shoots emerge
The new administration has aggressively changed policy on trade, federal spending and foreign policy. These changes have put dealmakers on their heels and curtailed M&A in the process. However, we see emerging green shoots across commercial real estate, signaling a cautiously optimistic outlook for the sector.
- Office-to-residential conversions continue to gain momentum. Creative dealmakers and developers able to make the economics add up and navigate complex financial challenges and regulatory hurdles are reaping the rewards. While only 73 office-to-residential conversion projects were completed in the US in 2024, up from 63 in 2023, 279 projects are slated for completion in 2025 and beyond. This activity is taking place in an environment where some business leaders are “calling time” on full-time remote working — and in some cases even hybrid working models — advocating for a return to in-office work. These moves provide hope for growth in the beleaguered office sector.
- The global digital economy is reshaping real estate investment, with data centers emerging as a dominant alternative asset class. This evolution reflects a broader trend: the widening of real estate categories beyond traditional sectors like office, retail and industrial into cold storage, life sciences and senior living. Data centers occupy a critical intersection of real estate, infrastructure and energy. Their viability ultimately depends on electricity costs, power availability and sustainability mandates, but ever-increasing data demands will continue to underpin rising institutional investment in them.
- Recent US tax policy updates impacting the real estate industry include potential extension or reform of certain key Tax Cuts and Jobs Act (TCJA) provisions. Those favorable to the real estate sector include restoration of 100% bonus depreciation for qualified property, increased Qualified Business Income (QBI) to 23% for pass-through entities, preservation of tax-deferral treatment on Section 1031 exchanges and mortgage interest deductions, and enhanced tax incentives under opportunity zones program and Low-Income Housing Tax Credit (LIHTC).
Looking ahead
Commercial real estate M&A activity is showing renewed momentum in 2025, despite lingering caution across the market. While some market participants may still feel the impulse to delay transactions, stepping back now could mean missing out on strategic opportunities.
Major transactions such as Blackstone’s $4 billion acquisition of Retail Opportunity Investments and Apollo’s $1.5 billion acquisition of Bridge Investment Group reflect unwavering sector confidence and the view that repriced assets offer long-term value. Private equity firms, sovereign wealth funds and insurance companies alike are ramping up their activity, particularly in sectors like hospitality and privately held office portfolios.
At the same time, increased consolidation presents an opportunity to create value through scale, portfolio diversification and operational efficiencies. Although deal volume has not fully rebounded, early indicators suggest we are entering a new phase of strategic consolidation, not just cyclical recovery. In a “higher-for-longer” rate environment, those who move decisively can capitalize on this inflection point and shape the next chapter of growth.
“The commercial real estate industry continues its transformation, with significant value-in-motion that will be the catalyst to drive deal activity higher in 2025 and beyond.”
Tim Bodner,US Real Estate LeaderThe bottom line
While uncertainty is expected to persist in the short to medium term (driven by interest rate volatility, inflation, geopolitical instability and structural shifts in demand) there are opportunities for well-capitalized and strategically positioned investors.
We’re keeping an eye on sustained, technology-driven demand for data centers and power infrastructure, refinancing pressures tied to upcoming debt maturities potentially resulting in distressed sales and price discovery, and market repricing cycles triggered by shifts in monetary policy.
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