The year ahead is shaping up to be a dynamic one for REITs, with both headwinds and tailwinds for growth across individual real estate property sectors. REITs will continue to face big issues in 2025 that include changing demographics, the impact of artificial intelligence (AI), an uncertain path for inflation and interest rates, and the possibility that shifting tariff policies and rising labor costs could restrain commercial real estate performance.
Overall, REIT portfolio managers say the industry is well-positioned to see continued growth in 2025 as favorable supply/demand fundamentals and solid balance sheets position REITs to become net acquirers and provide liquidity to the broader commercial real estate market.
REIT.com recently spoke with Brian Jones at Neuberger Berman, Kristin Kuney at Goldman Sachs Asset Management, Gina Szymanski at AEW Capital Management, and Jason Yablon at Cohen & Steers, to get their views on the opportunities and challenges that they see ahead.
How do you see macro fundamentals impacting REITs in 2025?
Brian Jones: Macroeconomic fundamentals should generally be supportive of REITs in 2025. I believe it is reasonable to expect pro-growth, lower-regulation policies to be implemented by the president-elect’s administration. This type of economic/political backdrop should be supportive of economic growth, consumer and business confidence, and lead to solid tenant demand for most REIT property types.
As it relates to real estate supply, the total cost of new construction for many property types remains high relative to current rent levels, reducing the risk of new construction. If the new administration enacts material immigration reform and significant tariffs, this could further increase the cost of new development.
Kristin Kuney: There are several crosscurrents going into 2025, with potentially large policy changes being discussed by the incoming administration. We believe a stronger economy would benefit real estate, as it is a derivative of economic activity. Potential tariffs could increase domestic manufacturing activity, which could drive demand for local real estate as well.
On the other side, higher inflation from tariffs could keep interest rates higher, which could be a headwind. Immigration changes could impact sectors that are more dependent on migrant labor, like hospitality and health care. In our view, staying balanced across property sectors is the preferred strategy to employ given the magnitude of policies that are in flux at the moment.
Gina Szymanski:
While we think 2025 will be better than 2024 for the asset class, the following two years after that, 2026 and 2027, could be absolutely huge for public REITs. That’s because interest rates will likely be lower than they are today and building supply will not yet have caught up from the COVID slowdown followed by a period of high interest rates which has hampered new construction. This, of course, depends on the sector. For some sectors, like senior housing, we can make the case that supply doesn’t come back for even longer.
Jason Yablon:. GDP growth and job growth will decelerate in 2025 but remain healthy, which will support demand for commercial real estate. As a result, the asset class is seeing resilient NOI growth and favorable supply and demand fundamentals, which will lead to improving cash flow per share growth over the next several years. Inflation should show some progress in 2025 but may remain above Fed targets, which implies that construction costs continue to increase, and future supply remains modest providing more runway for landlords to push rents as tenants lack competitive options.
REITs are well-positioned in the new rate regime given attractive starting valuations, their diversification benefits, and other market factors like increased geopolitical uncertainty and commodity undersupply. The economic environment we are entering has historically resulted in strong performance for real assets, and we believe that many of these categories, including REITs, will outperform the broader equity market.
Which property sectors are you most enthusiastic about for 2025, and why?
Kuney: We see limited availability of new space in 2025 in most sectors, and we believe that where we think there is a demand/supply imbalance, it will favor existing asset owners. We continue to believe rental housing will perform well given the likely ‘higher for longer’ interest and mortgage rates, which will keep home buying at below average levels.
The industrial sector has become more interesting given the relative underperformance, with the recovery coming into view in later 2025/early 2026. Sentiment in the sector is quite negative, so you could see a sharp snapback as investors believe the recovery is close, with the prospect of healthy rent growth returning.
Szymanski: The sectors we think have the strongest fundamentals (supply and demand) going into 2025 are data centers and senior housing. We think those have the best growth prospects in our investable universe. Senior housing has favorable demographic trends. Retail is experiencing the best supply/demand backdrop in a decade, while data centers are benefiting from secular demand for more data storage and computing power.
Yablon: We believe data centers will continue to benefit from increased demand for AI while cell towers are attractively valued, and we think new leasing activity should pick up over the next year. We also see attractive demographic trends for senior housing from aging baby boomers and single-family rentals given the housing shortage.
Jones: The REIT sub-sector with the best internal growth fundamentals remains senior housing. The combination of occupancy rates that have still not fully recovered from the pandemic, an addressable market that continues to grow as baby boomers move into their 80s, and a historically low level of new supply under construction have combined to create the opportunity for another year of double-digit same-store growth.
As you position your real estate funds for 2025, are you anticipating any property sector allocation changes?
Szymanski: We aren’t expecting to make any major changes in 2025. That’s partially because we had made some changes to the portfolio just prior to the election in anticipation of President-elect Donald Trump winning. That included reducing net lease exposure, such as medical office, cell towers, and traditional net lease because those subsectors benefit from lower interest rates. We also leaned into more of the pro-cyclical areas, increasing our retail exposure along with other strong GDP-correlated sectors like hotels and offices based on general expectations of Trump’s administration being pro-GDP.
Jones: We have taken a closer look at the hotel and office sectors. Both sectors have experienced some level of secular use change in the post-pandemic environment. As more employers increase required in-office work amongst their staff, office fundamentals are stabilizing in many markets and showing material improvement in others, such as New York City.
On the hotel side, the proliferation of Zoom meetings has eliminated some non-essential business travel. However, we believe the peak impact of the Zoom effect may be behind us and the greater appreciation of the value of face-to-face interactions will contribute to improved business travel trends. We think business confidence is a key factor in incremental office and hotel demand and the pro-growth, deregulation stance of the president-elect should strengthen business confidence.
What are likely to be some of the key themes in private versus public real estate investing in the coming year?
Yablon: We think it’s important to note that even though the private real estate market appears to have bottomed in the second quarter of 2024, real estate distress peaks in the 12 to 24 months following the bottom and headlines are likely to continue being unfavorable. In this type of environment, we think REITs can provide liquidity to the broader commercial real estate market and become net acquirers as they were from 2010-2014 in the early phase of the previous cycle. This is due to their strong balance sheets, favorable supply and demand dynamics, and access to diverse sources of capital.
Kuney: Private real estate values have come off from their peak at the end of 2022, and there are signs that they are inflecting positive. The public markets have had a bounce off the bottom, and we have seen that, over time, the two markets generally move in the same direction. In 2024, we saw increased acquisition activities from the public companies because capital had become more available in the public markets relative to the private markets, which we think is likely to continue into 2025.
Relative to a year ago, the valuation differential between the public and the private markets has closed, and they are now trading more in line with each other. We believe that a stronger economy should drive the performance of both the public and private real estate markets.
Are there any particular secular or cyclical trends that you will be watching, which could inform or influence your investment strategy in the coming year?
Jones: There are a number of secular trends we are monitoring in regard to their investment impacts. The baby boom generation entering their 80s is a positive demand driver for senior housing and skilled nursing sub-sectors; higher mortgage rates are an advantage for renting versus owning a home; AI demand continues to increase, driving demand for data centers; and a continuation of return to office momentum is impacting tenant demand and valuation levels for office.
Szymanski: We are paying particular attention to the work-from-home trend.
Now we are seeing a tale of two coasts. On the East Coast, and particularly in New York in the financial services sector, companies put their foot down early and asked employees to come back to the office. That has fueled not only demand for office space, but many other related real estate sectors tied to tourism, such as retail. We haven’t seen that on the West Coast. To the extent that theme plays out in other parts of the U.S. will have an impact on the vibrancy of cities in the long term.
Kuney: Capital spending on developing the 5G telecom networks in the U.S. has been muted in the last couple of years, and we are watching the space carefully as we believe the sentiment on tower REITs have been negatively affected by this development. An inflection in capital spending on tower networks should help drive the performance of this sector. Tenant demand in the Southern California logistics market has been low after several years of strength and substantial rental rate growth. We are looking for an inflection in that as well.
Yablon: We are watching how the change in presidential administration will impact the market at large and REITs specifically. Although the change in administration and potential increases in interest rates may unsettle markets in the near term, history shows that the direction of the economy and job growth tend to have a greater impact on REIT returns than rising rates do.
Are there specific priorities you want to see REIT management teams focus on in the year ahead?
Yablon: REITs were remarkably resilient over a challenging couple of years for real estate, proving that they learned their lessons from the GFC. As such, they have been well-positioned from a fundamentals perspective over the last few years, displaying stronger balance sheets, resilient cash flows, and lower loan-to-value ratios. For these reasons, we believe REITs are well-positioned to become net acquirers at this point in the cycle and to provide liquidity to the broader commercial real estate market.
Jones: In 2025, I believe labor issues will be an important consideration for most REIT management teams. The availability and cost of employees that can help REIT portfolios maximize their earning potential will become an important differentiator. Balance sheet management should also remain a top priority as flexible low-leverage balance sheets help cushion the impact of higher interest rates and position REITs to capitalize on external growth opportunities when the time is right.
Szymanski: In 2025, atop the risks we hope companies are paying attention to or making plans to manage through, are access to and rising costs of labor. Particularly now with potential changes in immigration policies, we want to ensure companies are thinking about those risks in some of the more people-intensive businesses in sectors like health care, cold storage, and lodging.
For companies experiencing improved cost of capital over previous years, we want to make sure they will be diligent in deploying that dry powder wisely. This is a good time to deploy it, but we want to make sure they are doing so prudently.
Kuney: We believe capital discipline, in an environment where capital is available but expensive, is going to be key in creating long-term shareholder value. We want management teams to be judicious in pursuing acquisition opportunities because we believe that there will be more opportunities to acquire assets after a period of low liquidity in the direct markets.