2025 was set to be the big recovery in real estate with rates lowering setting us up for a great year. Instead, rates are hovering around 7%, inventory is rising, and long term treasuries are pointing to higher rates for longer. There is also a trade war and talks of a recession in the midst of the peak spring selling season. Have my predictions for 25 real estate changed?
What are my predictions for real estate in 2025?
What did I say in December?
2025 looks to be more of 2024, but likely will not happen exactly as economists have planned. Unfortunately, there are more negative than positive risks for real estate heading into the second half of 2025.
In the first half of the year, I do not see the bottom dropping out of prices. There will be some softening with prices dropping in the 5-10% range, some markets will hold steady while others could still increase further. The real test comes in the second half of the year when consumers face the onslaught of bills from credit cards and buy now pay later for all the spending.
Furthermore, interest rates will remain much higher than the market is currently anticipating, which will ultimately lead to a reset in the economy.
What happens the second half of 2025?
I feel good with my predictions; so far I’ve been spot on with interest rates remaining high and sales volumes continuing to fall.
The interesting part is that I didn’t predict the trade war and softening of the economy, but at the end of the day we ended up at the same place.
On the commercial side, high interest rates will continue to put pressure on cap rates. Remember that the higher the cap rate the lower the value (they work in inverse to each other. Office is going to get destroyed with values dropping around 30%-50 overall due to lower demand, higher financing rates, and much higher cap rates. Retail and Industrial will also come off their highs as cap rates continue to rise to keep up with the rise in treasuries. Rents will not be able to rise fast enough to compensate for the higher cap rates.
The wild card is what happens late 2025 as higher interest rates continue to dampen demand; furthermore, the federal reserve must hold rates higher for longer which will keep rates from falling back to their lows. Worst case scenario 10-15% price drops, likely is somewhere under 15% reset in prices. This will not occur until late 2025 as the consumer finally comes to terms with increased borrowing costs and slows down their spending.
Commercial is a different ballgame as commercial properties are at much higher risk for larger price drops. For example, large class C office will need a huge reset in prices which could be in the 60%+ range.
On the residential side: look for volumes to continue to decline while inventory adds up which will lead to a softening of prices in most markets especially in expensive markets like Denver. There will likely be a reset in the 5-10% range for prices in most markets with some expensive markets seeing 10% plus declines. I don’t see the bottom falling out, but going to get bumpy in residential real estate the later part of the year. On a separate note, the condo market in most major markets is coming under huge pressure especially on the more cost effective units so this is an area where we could see much larger price resets
Will there be a recession in 2025?
I’m going to put my odds at 40% for a recession in 2025. As rates remain higher commercial real estate values will continue to plunge which will lead to less lending and ultimately more bank failures. Eventually the lack of liquidity will flow through to consumer spending leading to a slowdown. Unfortunately, the risks of recession are mounting as there is always a lag in the economy. Furthermore, we have the wild card of consumer sentiment where everyone is talking about a recession, will this make us end up in one. Fortunately my data is not showing an indication of a huge inflection point in the economy, but there are some macro factors that could throw us all for a loop. For example the sharp run up in treasuries while stocks also fell was definitely out of the ordinary and if this trend continues could be an ominous sign for a bigger reset. Although the probability is low, the volatility we are seeing is a bit of a warning.
Summary:
2025 is going to continue to be a bumpy year in real estate. We are already seeing signs of this on the residential side with the median prices on condos off 5% in Denver year over year and volumes down 20%. This is just the beginning of the reset in real estate.
Commercial real estate is a whole different animal with rents dropping, vacancy rising, and ultimately prices facing a huge reset especially in the office sector along with retail. If rates remain higher for longer, there will be increasing stress on every commercial property type as cap rates remain elevated.
Anyone in residential or commercial real estate is going to have a tough ride as volumes will stay extremely low throughout the nation until there is a major reset in the economy that forces individuals and businesses to sell and rates to fall substantially. Long and short 2025 looks like a tough year in real estate and worse than 2024. Fortunately every single cycle creates new opportunities and we can always look forward to 2026
It is important to note that as always, real estate is market specific so when we look at the big headlines, that is basically meaningless for your particular market. Higher priced markets like Denver will face considerably more price pressures than a city like Atlanta due to the median price of homes and the number of employers migrating to Atlanta and the South in general. So although the national predictions are for x or y, take this into account when you are evaluating your particular scenario.
Additional Reading/Resources
- https://www.bloomberg.com/news/articles/2023-11-02/housing-crisis-gets-worse-for-americans-on-mortgage-lock-in-effect?srnd=premium
- https://car-co.stats.showingtime.com/docs/mmi/x/Statewide?src=map
- https://www.wsj.com/business/the-rising-price-of-cardboard-a-positive-sign-for-the-economy-08908d0f
- https://www.fairviewlending.com/why-are-house-prices-still-rising/
- https://www.fairviewlending.com/does-the-trump-election-matter-for-real-estate-homes-sales-lowest-since-95/
- https://www.fairviewlending.com/federal-reserve-cuts-rates-should-you-rejoice/
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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