Commercial real estate (CRE) investing in the United States is currently navigating a complex landscape marked by rising interest rates and increasing office vacancies. While these factors present challenges, the broader real estate market is still projected for significant growth, with projections reaching $155.60 trillion by 2029. This underscores the importance of strategic investment to achieve growth even in uncertain conditions.
Current Trends Impacting CRE Investment (Mid-2025)
The CRE market is being shaped by several key trends:
- Elevated Office Vacancy Rates: The national office vacancy rate has climbed to a record high of 20.6% in Q2 2025, with some forecasts predicting it could reach 23% by the end of 2025 and 24% by 2026. This is driven by the continued shift to hybrid and remote work models, leading to companies reducing their physical footprint. Outdated office buildings are particularly struggling to compete with newer, amenity-rich, and green-certified spaces.
- Rise of E-commerce and Logistics Demand: The e-commerce boom continues to drive strong demand for industrial properties. Logistics and distribution accounted for a significant portion of leasing activity in 2023, drawing investor attention away from traditional office spaces. While the industrial sector has seen some normalization from its pandemic-era highs, it remains fundamentally strong with low vacancy rates (around 7.5% in Q2 2025) and steady rent growth.
- Sustainability and ESG Priorities: Tenants increasingly prefer “green-certified” buildings with energy-efficient systems that align with Environmental, Social, and Governance (ESG) principles. This trend puts pressure on owners of older properties to upgrade or risk obsolescence.
- High Interest Rates and Financing Challenges: Sharply rising interest rates have made refinancing and new investments more expensive, impacting property valuations and deal flows. A substantial amount of CRE loans (over $950 billion) are maturing in 2025, posing refinancing challenges for many property owners. However, there are signs that lender underwriting tightening has eased considerably compared to the past two years, with some projections indicating a high probability of increasing property values in 2025.
- Resilience of Other Sectors: While office struggles, other CRE sectors demonstrate resilience.
- Multifamily: Remains strong, with net absorption doubling year-over-year in Q1 2025 and stable occupancy rates around 94.3%. While some Sun Belt markets face overbuilding concerns, modest rent growth is observed, and Class B properties are particularly appealing.
- Retail: Continues to perform well, particularly grocery-anchored neighborhood centers and high-end retail, with low vacancy rates (around 4.2% to 4.8% in Q1 2025).
- Alternative Sectors: Data centers, self-storage, and medical offices are showing robust performance, often with higher occupancies and returns than traditional sectors.
Popular Ways to Invest in Real Estate
Investors have several avenues to gain exposure to real estate:
- Direct Ownership: The most hands-on approach, involving direct purchase and management. Offers high control but comes with significant responsibilities.
- Real Estate Investment Trusts (REITs): A passive option allowing investment in diversified portfolios of properties through publicly traded shares, providing liquidity and regular dividends without direct management.
- Private Equity Real Estate Funds: Pool money from multiple investors for commercial property acquisitions, aiming for significant returns. Requires higher capital commitment but delegates management.
- Joint Ventures and Partnerships: Collaboration with partners to mitigate risk and enable larger investments, requiring aligned goals and shared decision-making.
- Crowdfunding: Low-barrier entry to real estate deals online, allowing investment with smaller amounts, flexible and suitable for beginners.
Types of Commercial Real Estate Investment Strategies
CRE investment strategies are often categorized by their risk-return profile and required level of active management:
- Core Investments:
- Focus: Stable, fully leased properties in well-established locations.
- Characteristics: Low risk, predictable steady income from long-term leases with reliable tenants, minimal active management.
- Examples: Fully occupied Class A office building in downtown Boston, distribution center leased long-term to a national retailer, medical office complex in a primary healthcare hub.
- Outlook: A slow-and-steady approach, offering peace of mind and considered a smart move for those seeking steady income with minimal stress, especially given that 36% of Americans view real estate as the best long-term investment.
- Core Plus Investments:
- Focus: Quality properties that are mostly stable but may require minor upgrades, new leases, or improved management to enhance performance.
- Characteristics: More flexibility than core, moderate risk, leading to stronger returns (typically 8% to 10% annual returns).
- Examples: Multifamily property with below-market rents and cosmetic upgrade potential, office building with expiring leases in a growing metro, retail center with a few vacant units and room to improve the tenant mix.
- Outlook: Balances income and growth potential, suitable for investors comfortable with a bit more responsibility.
- Value-Add Investments:
- Focus: Properties requiring significant improvement through physical upgrades and operational enhancements.
- Characteristics: Higher risk, often with higher vacancy rates or deferred maintenance, but offer substantial opportunities to boost value through renovations, re-leasing, and strategic management. 56% of investors prefer value-add strategies, indicating strong interest.
- Examples: Mid-rise apartment building needing renovations and a refreshed marketing approach, aging office park with low tenant retention, suburban shopping center with outdated signage and vacant anchor spaces.
- Outlook: Can deliver meaningful long-term rewards for those comfortable with calculated risks and a hands-on role.
- Opportunistic Investments:
- Focus: Boldest strategies involving ground-up developments, foreclosed properties, or major redevelopments.
- Characteristics: Highest risk, require more time, capital, and expertise, but offer the potential for substantial rewards. The rise in foreclosure filings (357,000 properties in 2023) presents a growing pool of distressed assets.
- Examples: New apartment complex development in an emerging city, buying and rehabbing a foreclosed hotel in a tourism rebound market, converting an outdated mall into a mixed-use residential and retail hub.
- Outlook: Built for investors with significant resources and patience who aim for the highest growth potential.
How to Choose the Right CRE Strategy
Selecting an appropriate CRE strategy involves self-assessment and market awareness:
- Know Your Risk Tolerance and Return Goals: Align your comfort level with risk and desired returns with the inherent characteristics of core, core plus, value-add, or opportunistic strategies.
- Consider Your Time Horizon and Capital Commitment: Assess how much time and money you are prepared to invest, as some strategies require longer commitments and larger upfront capital.
- Watch Market Trends and Economic Conditions: Stay informed about interest rates, inflation, and shifts in demand (e.g., rising office vacancies may favor industrial or multifamily). Staying informed provides a clearer edge.
- Decide Between Active and Passive Investing: Determine your desired level of involvement. Active strategies offer more control and potentially higher returns but demand more effort, while passive approaches are less hands-on with steadier income.
- Connect With Professionals: Seek guidance from trusted advisors who can help navigate options and select a strategy best suited to your goals.
Conclusion
Success in CRE investment in the current dynamic market requires choosing the right strategy and, often, partnering with experienced professionals. Despite challenges like office vacancies and higher interest rates, resilient sectors and strategic investment approaches continue to offer opportunities for consistent returns, tax advantages, and long-term value. Investors with precision, discipline, and access to opportunities can still build significant wealth in this evolving market.