2025 mid year forecast - by Michael Packman

As we find ourselves in the third quarter of 2025, there continues to be some uncertainty in parts of the real estate market. However, as we are a little over two quarters into the current presidential term, valuations seem to have stabilized in most asset classes despite higher capital costs than just a few years ago. When we look at our investments, typically with a 1031 exchange mindset, we focus on capital preservation, cash flow and modest capital appreciation with a long-term perspective.

With this long-term view, we are less focused on the capital markets of today as we are analyzing the underlying dynamics of our investments: market vacancy, absorption and the strength of our tenants’ businesses. Working with our property management team, we continue to research opportunities for stability and risk-adjusted growth in both the office and retail sectors. Here is a summary of some of our high-level research.

Office Property Forecast
Office occupancy overall is trending to be a slow but steady recovery from pandemic lows, with hybrid work models becoming increasingly prevalent. While office utilization remains below pre-pandemic levels, there’s a gradual increase in occupancy, and some markets are seeing a rise in office visits, particularly in newer, high-quality spaces. However, vacancy rates remain high, and the overall trend suggests a shift towards more flexible and optimized office spaces.

Colliers reports in their mid-year update that new office construction remains limited across the U.S., well below pre-pandemic peak levels. However, an increase in new development will serve as a leading indicator of the office market’s recovery on a broader scale. Midway through 2025, the 15 leading office markets had 21.6 million s/f under construction. Overall, the pipeline is 58.9% pre-leased, with 60% of the markets having more than half of their pipeline committed. The Dallas-Ft. Worth market has the largest amount of space underway, 4 million s/f, which is 79.2% preleased. The leading driver for new office leasing is finance, insurance and real estate firms, representing 50% of the pre-leasing for new construction.

Retail Property Forecast
The retail property forecast for 2025 indicates a dynamic and resilient market influenced by economic shifts, consumer demands, and e-commerce influences. The forecasts that retail sales in 2025 will grow between 2.7% and 3.7% over 2024, reaching between $5.42 trillion and $5.48 trillion. This growth is in line with the 10-year average prior to the pandemic. Online and other non-store sales are expected to increase by 7% to 9% year-over-year, reaching a range of $1.5 trillion to $1.6 trillion. Suburban retail centers are gaining prominence due to population migration to the suburbs and hybrid work models, with a 50% increase in tenant demand compared to urban locations. Retailers are adapting to smaller more flexible footprints with fast service restaurants and health and wellness leading the way. Trends to watch for market opportunities are all-time high occupancy rates, recent retailer bankruptcies and potential for new leases in suburban and Sun Belt areas. Consumer preferences are evolving with budget-conscious consumers prioritizing essential goods, with grocery-anchored centers and open-air centers becoming community gathering places. The total share of online sales expected to exceed 30% by 2030, up from 23% in 2024.

Conclusion
Based on the research above, offices continue to lease, albeit slowly. While many investors may not be looking at office investments due to continued price softening, pricing can provide favorable opportunities for investors that research the details and have a good understanding of the underlying tenancy. Newer properties designed to meet the current workplace models appear to be attracting attention. In previous articles, I have focused on the business model of the tenant as well as its creditworthiness. These dimensions continue to be important when seeking a stable investment.

Retail seems to be a slightly different picture when looking at suburban markets. With work trends providing more work-at-home opportunities, retail appears to have a path for steady growth. Like office, the tenants’ footprints may be changing, but they are doing so to adapt to consumer needs and to maximize revenue per s/f. As an investor, understanding the tenant’s model as well as their growth and adaptability can provide important insight into a potential investment opportunity. Even though online sales continue to grow, consumers have shown continued demand for brick-and-mortar storefronts.

Overall, for investors seeking opportunities for long-term investments, they are out there for the right investor. Good, in-depth analysis from the macro level down to the smallest details often can make specific opportunities apparent, even with macro-economic uncertainty.

Michael Packman is founder and CEO of Keystone National Properties (KNPRE), New York, N.Y.