The Business Record reached out to several people in the commercial real estate industry, asking them their thoughts on the outlook for the sector in 2025 and biggest challenges. Below is the question we asked and responses we received:

Question: The past four years have been challenging for the commercial real estate sector. Looking forward to 2025, what is the outlook for the sector in your area of expertise? Also, what do you see as the biggest challenge facing the sector in 2025?

Richard Hurd, founder and president of Hurd Real Estate

The commercial real estate sector has been under pressure the past year. The market is out of sync, and it will not be corrected quickly as the fundamental issues that have created the problem still exist —

high interest rates, high construction costs and stringent municipal requirements. The combination of these factors makes it difficult to build new product and lease it at a profit. The projects that are proceeding are mostly heavily [tax increment finance] incentive driven and that is primarily directed to multifamily and mixed-use development. In my opinion, 2025 will be very similar to 2024 [and] it will be later in the year before we see noticeable improvement in the fundamentals.

Ryan Wiederstein, broker/owner WB Realty Co.

The office market experienced an uptick in activity during the second half of 2024, a trend I anticipate will continue into 2025. As companies prioritize relocating to more strategic locations closer to their employees, the continued shift from remote work back to office-based operations is driving demand. However, the biggest challenge in 2025 will once again be high interest rates. These conditions are likely to create additional strain on lenders with broad national exposure, potentially leading to some commercial property owners facing financial difficulties locally.

Adam Kaduce, president of R&R Real Estate Advisors

I see greater opportunities in 2025 for redevelopment. Construction costs, interest rates, and the existing stock of office buildings keep the development of new office space limited to build to suit a boutique project. There is real potential for continued redevelopment downtown and in the suburbs. One of the areas with a great deal of promise is the University corridor. There remains strong potential there for additional housing and retail and we may begin to see some of those projects take shape. The area has unmatched accessibility, and retail and housing projects would support the existing office supply. At R&R, we have continued investment planned in the area, continuing to put dollars toward office build-outs and amenities that meet today’s demand. Given the success of our Arcadia Building redevelopment, we think there is opportunity to take those modern amenities to other buildings. We are bullish on office leasing activity as we enter 2025 and are seeing two promising trends, a continuing flight to quality and businesses making long-term commitments for office space.

Ajay Kalra, managing director, CBRE

We have seen some momentum post-election with the economy that will help drive commercial real estate into next year and has us bullish for additional economic growth. We project cap rates to compress slightly and allow investors the opportunity to secure long-term returns, particularly on industrial and multifamily assets, furthering a competitive landscape. With long-term interest rates remaining relatively high, the high cost of home ownership provides stability to the multifamily sector. There’s increasing pressure in the data center market, with the need to support the digital economy and artificial intelligence and most new development will happen here. We could see more emphasis on nuclear power to keep up with demand delivering less strain on our infrastructure. The office market has stabilized, enabling occupiers to evaluate their portfolio with confidence. As mentioned, headwinds include the 10-year Treasury remaining above 4% as we continue to face budget deficits and fiscal policy changes affecting the cost of capital. Refinancing of commercial space is still a hurdle, as well as the risk of stagflation. Increased discussions around tariffs and trade policies, in addition to consumer spending habits, will [affect] industrial and retail markets, creating some uncertainty.

Anna Squier, associate principal, MA Architects

As we look toward 2025, several key trends in commercial real estate are shaping the market. These trends are largely influenced by evolving work patterns, technological innovations, sustainability goals, and economic shifts. The commercial real estate industry seems poised for strategic recalibration. This will require adaptability and innovative approaches to space design. The hybrid work model is expected to continue driving changes in office demand. Companies may continue to reduce the amount of traditional office space they lease, shifting toward flexible office layouts. This shift in workspace utilization is promoting developers to explore alternative property uses like residential conversions. We are seeing this in downtown Des Moines. While these transformations offer potential urban revitalization opportunities, they involve complex, costly processes. Although costly, it is encouraging and innovative adaptive reuse with the potential to reshape city centers. There has been a rise in demand for flexible workspaces and office buildings that provide more amenities such as wellness centers, outdoor spaces, and advanced technology infrastructure.The demand for environmentally sustainable buildings will intensify as business and municipalities prioritize sustainability goals and we will see an increase in the use of sustainable construction materials to reduce the embodied carbon footprint of commercial buildings. The architecture industry in 2024 has remained active. Over 25% of firms have 11-15 active projects, the highest mark since January 2023. Although architectural billings are down to the lowest they have been since the first quarter of 2023, firms are seeing an increase in inquiry activity, which is promising for 2025. Economic concerns remain the highest business concern for a majority of firm leaders, but the industry is well poised to respond to commercial industry trends and the current economic outlook.