The global economic narrative in 2025 has been dominated by an evolving geopolitical and trade policy environment. While real estate markets were generally resilient during the first quarter, an atmosphere of unpredictability has weighed on business confidence and put renewed focus on supply chains. Most major markets are expected to see positive growth this year, but the outlook is dynamic and depends on U.S. trade policy and the trade, fiscal and monetary response from across the rest of the world.
Occupier activity in Q1 was mixed, with varied performance across markets and property types. Many industrial and retail tenants are reviewing the impact of new tariffs on their supply chains and operations. At the same time, global office leasing continued to recover, with all three regions recording an increase in activity from Q1 2024.
Concerns surrounding the economic impact of recent tariffs are resulting in a change in sentiment for investors, ushering in a renewed period of unpredictability. While the investment community has come to expect volatility and has been operating during periods of heightened uncertainty over the past five years, each new market inflection point causes an initial disturbance, followed by a period where investors need to evaluate the impact on their investments and capital deployment strategy.
It should be noted that the commercial real estate sector has entered this period of volatility in a relatively healthy state. The protracted asset value resets during the past 2.5 years have effectively de-risked the asset class, and the sector’s relative value vis-a-vis public market investment alternatives also presents a favourable backdrop. Debt and credit levels across the globe are healthy, with liquid debt markets supporting capital markets activity. And the performance of existing assets will benefit from waning supply pipelines in many mature markets. Although signs of plateauing are beginning to emerge, asset values have generally held steady and bidding intensity was active at the start of the year.
Direct transaction activity totalled US$185 billion in the first quarter of 2025, rising 34% year-over-year. Several factors coalesced to drive continued growth in activity, including liquid debt markets, increased institutional bidding, a gradual uptick in transactions of scale, and a year-over-year rise in cross-border transactions. Transaction volumes in the Americas in the first quarter reached US$93 billion, up 37% year-over-year. EMEA transaction volumes totalled US$55 billion, marking a 41% increase. In Asia Pacific, transaction volumes rose to US$36 billion, 20% higher.
Cross-border investment increased by 57% year-over-year in the first quarter. This marks the highest first quarter level since 2022, evidencing how the continued improvement in capital markets dynamics during much of the quarter led to additional normalization of cross-border activity, only to face increased variability at the start of the second quarter.
Across the sectors, investors are focusing on asset quality, tenant credit and sectors in the path of secular growth. Industrial and logistics, living and selected alternatives remain the most sought-after. The share of capital invested in the retail sector marked a slight increase, representing a heightened share compared to the past five years, but transactions of scale are still below potential. Bifurcation across and within sectors persists, most notably within the office sector in the U.S., although office transactions have improved to start the year.
Global office leasing continued to recover in Q1 despite a volatile economic backdrop, with all three regions recording an increase in activity from Q1 2024. Renewals and extensions are accounting for a higher share of leasing across regions amid limited new supply in North America and Europe, combined with rising rents and fit-out costs.
Groundbreakings have fallen to a new record low in the U.S., and while construction is rising in Europe, supply in central submarkets remains exceptionally tight. This is expected to contribute to vacancy peaking and beginning to fall in both regions this year. With less new space coming to the market and availability concentrated in less desirable buildings and locations, occupiers will need to explore options earlier as competition for the best space intensifies.
Short-term: Although an unpredictable economic outlook is likely to slow decision-making, continuing progress in office re-entry programs, reduced downsizing rates and a build-up of lease expiries are expected to support the office leasing recovery in 2025.
Long-term: Limited new construction and high pre-leasing rates will intensify competition for high-quality central space in many markets, while vacancy will remain elevated in older and non-core buildings. With prime rents and fit-out costs continuing to rise we expect stronger demand for refurbished projects and non-CBD submarkets.
Industrial leasing activity showed signs of stabilizing in Q1 despite the unpredictable environment and occupier caution. However, the imposition of new tariffs by the U.S. administration following the end of the quarter has led to heightened uncertainty as companies wait for additional developments and assess the impact to supply chains, production and the economy.
Short-term: Many companies impacted by tariffs will be prioritizing short-term planning and flexibility. In this environment, some will accelerate, reroute or pause shipments while utilizing overspill space; others will be looking for short-term deals or renewals as they put additional decision-making on hold.
Long-term: E-commerce growth and urbanization will continue to support demand, while the longer-term effects of evolving trade policy are still uncertain. Supply chains require an extended period to adjust, with manufacturing facilities generally taking 3-5 years to bring online; this will slow decision-making until greater clarity emerges. The reshoring of high-value manufacturing is likely to keep increasing, leading to greater demand for industrial space equipped to handle advanced production and related supply chains in markets less impacted by trade barriers.
Retail market performance was varied across regions during Q1, with rising store closures in the U.S. contributing to the first quarter of negative net absorption for four years. Although power and neighborhood center vacancy is likely to continue increasing, the market is still supply-constrained for newer, Class A space. In Europe and higher-growth or tourism-oriented economies in Asia Pacific retailer demand remains healthy for premium central space.
Short-term: Divergence in retail market performance is likely to continue through 2025. In the U.S., supply chain concerns will lead to varied responses as retailers assess the impacts of evolving trade policy. Markets with higher GDP and income growth, and tourism-oriented destinations are expected to see the most resilient consumer spending growth. With limited new construction in mature markets, prime locations will remain supply constrained.
Long-term: The increase in fulfillment costs has made in-store pick-up often more cost-effective than home delivery. As a result, retailers have gained renewed confidence in physical stores, with many expected to opt for larger formats that incorporate click-and-collect services. This hybrid approach offers several advantages: it improves profit margins, encourages in-store impulse buying when customers collect their orders and reduces storage costs for retailers.
Despite challenging geopolitical and economic conditions, the long-term positive fundamentals for living assets continue to drive growth in investment.
U.S. living investment volumes surpassed US$22 billion during the quarter. The living sector in Europe kept its position as the largest for transaction volumes, with the Q1 total reflecting both an uplift on Q4 and more than double the level in the same period last year. In Asia Pacific, the a further rise in investment maintained the positive trends recorded at the end of 2024.
Short-term: Undersupply will continue to be a pressing concern for housing markets around the world, with urbanization, international mobility and shrinking households contributing to growing rental demand. In spite of the volatile economic outlook, investor conviction in the sector will support the growth of larger platform, portfolio and entity-level deals in 2025.
Long-term: Growing institutionalization of housing markets as investors allocate more capital to living sectors and diversify into new markets is expected to lead to the number of countries achieving average annual investment of over US$500 million expanding to over 20 by 2030. Living is forecast to maintain its position as the largest sector for investment volumes with a further US$1.4 trillion in transactions over the next five years.
While Global Revenue Per Available Room (RevPAR) kept up its record-setting pace, growing 3.9% through the first two months of 2025, a renewed wave of uncertainty is on the horizon. Much of this stems from the U.S., the world’s largest outbound travel market post-Covid. Despite possible future travel pullback, current demand remains strong with all three regions posting growth over the year-to-date.
Short-term: Amid a challenging and high-cost construction environment, hotel brands are increasingly using their balance sheets to fuel net unit growth (NUG), a key driver of shareholder value. More brand M&A is expected to materialize throughout 2025. Third-party hotel management companies, non-traditional lodging brands, and hotels in the lifestyle sector are likely to attract the most capital.
Long-term: The global portion of branded hotels managed by third parties (i.e., franchised) increased 3.8pp in 2024 and should accelerate further in the next three-five years as most major hotel brands look to mitigate risk and fuel shareholder value. All major brands have signaled a willingness to shift management contracts into franchise agreements, which should free up capital to help facilitate transactions and increase brand-acquisition activity.
