Current State of the Market – 2025
On October 28, 2024, PwC and the Urban Land Institute (ULI) released their “Emerging Trends in Real Estate 2025 Report.” According to PwC leaders, this annual report looks forward to the year ahead, unlike most reports that review the last quarter or year. The report was compiled from surveys and interviews with over 2,000 real estate executives, investors, developers, and market experts. Respondents to this year’s Emerging Trends survey believe that we are on the cusp of the next upturn in the real estate cycle, making now the time to plan and lay the groundwork for the next two or three years of growth.
The skies are finally clearing over the commercial real estate markets, even if some dark clouds still linger. Industry professionals are more optimistic than a year ago, although realistic. Better times are ahead, but the healing process will take time.
Already, the industry mood is lightening. The share of respondents to the “Emerging Trends” survey who expect their firm’s profits to be “good” or “excellent” rose more than 20 percentage points, from just 41 percent last year to 65 percent this year. Last year, 45 percent of respondents expected profits to be just “fair,” and a substantial number (13 percent) feared they would be “abysmal” or “poor,” similar to the results from the year before.
Markets to Watch
Over the past 20 years, Emerging Trends has surveyed its members to evaluate the investment and development prospects of what has grown to be a list of 80 real estate markets across the United States. The survey reflects the viewpoints of a diverse group of real estate professionals, who rate the markets they know best in several categories—such as investment potential and development opportunities. The overall “real estate prospects” rankings are based on these components. The “Emerging Trends” survey focuses geographically on cities showing strong population growth, strong job growth, and a robust business foundation, which leads to innovation hubs and favors major Sun Belt cities.
In the 2024 report, survey respondents were downbeat across the board, giving lower scores to 74 metro areas while upgrading only five. This year, the ratings improved for half of the markets, while declining for the other half.
Dallas/Ft. Worth has replaced Nashville in the number-one spot this year. However, as seen in the chart below, the top seven positions remain in the “Sun Belt” markets:
- Dallas / Ft. Worth
- Miami
- Houston
- Tampa / St. Petersburg
- Nashville
- Orlando
- Atlanta
- Boston
- Salt Lake City
- Phoenix
Florida, in particular, is on a roll. The state has 10 markets in the survey coverage universe, and several registered double-digit gains in rankings this year. These include Miami, which soared 12 places to number 2; Tampa / St. Petersburg, which moved up 14 places to number 4; and Orlando, jumping 13 spots to number 6 overall. Additionally, Fort Lauderdale re-entered the top 20, moving up five places to number 16.
These markets are large and diverse yet still affordable, forming powerhouse economies that attract a wide range of businesses. Despite their large population bases, most are among the fastest-growing markets in the United States. Moreover, their economic performance has been solid through thick and thin. While every market lost jobs during the pandemic recession, recovery has been much quicker and more complete in these areas.
Property Type Outlook
Once again, industrial and distribution properties lead the pack, ranking first for both investment and development prospects, as they have for twelve straight years dating back to the Great Recession. Investment prospects remain positive in the manufacturing, flex, warehouse, and fulfillment segments of the industrial/distribution sector. Deal volumes have stratified in the industrial sector, albeit with fluctuations, as investors come to terms with the new cost of capital.
Data centers are a relatively new property type with ties to both infrastructure and net lease, and they are on a path to become one of the largest property types in the country over the next 10 years. Demand is growing, fueled by numerous drivers, including cloud storage, mobile data traffic, overall internet traffic, and artificial intelligence (AI), among other new and growing uses.
Data centers have historically clustered in areas with good connectivity to fiber and proximity to major population centers. Northern Virginia is the leading global data center market due to its early adoption of the internet ecosystem, proximity to government and military-focused users, key fiber optic connectivity, relatively available land, and low risk of natural disasters.
Today, approximately 70 percent of the world’s internet traffic passes through data centers in the Northern Virginia region. Key qualities of an attractive data center market include:
- Fiber connectivity
- Proximity to a major population base
- Government support, such as tax incentives
- Power availability and cost
- Low risk of disasters or disruption
- Low land costs
Niche Property Types: Life Sciences and Medical Offices
Since 2023, niche property types have gained prominence. Two of the highest-rated niche subtypes are life-science facilities and medical offices. These sectors generally command greater returns than traditional product types due to higher cap rates. Investors value the strong demographic tailwinds supporting these niche sectors during times of cyclical market challenges.
Life Sciences
The biomedical industry, which drives demand for life science real estate, is experiencing tremendous growth as new scientific discoveries lead to innovative medicines and therapeutics. Secondary and emerging markets have seen inventory growth during recent years. For example, the Raleigh-Durham market currently has 4.1 million square feet in progress. Many smaller markets boast high occupancy rates, such as Memphis and Charlotte, which are 100 percent occupied as of Q2 2024. In addition, 11 of the top 26 markets have occupancy rates above 95 percent as of Q2 2024.
According to the recent report by Cushman & Wakefield, life sciences-focused capital in 2024 exceeds pre-pandemic levels.
Medical Offices
Demand for healthcare services continues to grow as the population ages, new discoveries and medical advances increase treatable conditions, and the shift from reactive medical care to preventive care and wellness continues. There are currently 41,255 medical office buildings (MOBs) representing 1.6 billion square feet. MOBs can house a variety of tenant types and services, including urgent care, dialysis, ambulatory surgery, imaging, and standard physicians’ offices.
Low levels of construction combined with increasing demand for space have translated into higher occupancy. In the largest metro areas, absorption of MOB space has outpaced deliveries every quarter over the past three years. During this period, 33 million square feet were completed, while 45 million square feet were absorbed. This demand pushed average occupancy up 160 basis points, from 91.4 percent to 93 percent. Many metro areas are now at or below 5 percent vacancy, which creates significant supply pressure.
Unlike more cyclical asset classes, which are prone to recessions with lower occupancy and stagnant growth, MOBs tend to remain steady. Pre-pandemic, the average triple-net lease (NNN) rent for MOBs in top metropolitan areas was $21.86 per square foot. As of Q2 2024, average NNN rent climbed to $24.57 per square foot—a cumulative increase of more than 12 percent.
According to the “Emerging Trends” survey, Virginia Beach ranks in the top 10 MOB markets based on occupancy (98%) and year-over-year changes. The Bureau of Labor Statistics projects healthcare to be the most rapidly growing sector for the next 10 years, accounting for nearly 45 percent of new job creation during this period. Survey respondents believe that with the availability of industry-specific data, limited new supply, and increasing demand, investors will continue to expand their allocations to medical office and healthcare real estate.
Summary
Real estate capital markets are recovering. “We’re on the early end of the healing process, but we’re excited about the opportunities we’re seeing,” said one investment banker.
“Liquidity is steadily improving every day. Capitalization rates aren’t necessarily returning to historic lows because growth rates aren’t there—but every few weeks, you’re seeing more bids in the market. You’re seeing pricing get a little tighter, and debt spreads narrow.”
This sentiment summarizes the views of many investors and analysts interviewed for the 2025 edition of “Emerging Trends.” The Fed’s new direction and clear guidance on future moves are aiding price discovery, helping reduce bid-ask spreads between buyers and sellers. Additionally, lower debt costs are improving deal economics for more projects. Together, these factors are encouraging more investors and developers to move off the sidelines and transact—whether to buy, sell, lend, borrow, or refinance.
