2024 REIT Market Review
While posting a positive return of 8.8% during 2024, REITs underperformed the broader market for the year, lagging all of the major indices including the S&P500 (25.0%), the DJIA (15.0%), and the NASDAQ (29.6%). While the economy held steady and inflation stabilized, uninspiring earnings growth and relatively constricted transaction markets have limited potential upside. Further, expectations for rate cuts as a catalyst were short-lived, and after strong outperformance leading up to the September rate cut by the Federal Reserve, REITs limped into yearend, as the 10-year Treasury yield returned to levels on par with the first half of 2024. Across the property type sectors, the winners in 2024 were Regional Malls (27.4%), Data Centers (25.2%) and Healthcare (24.2%), while the laggards included Industrial (negative 17.8%), Manufactured Housing (negative 3.1%), and Lodging (negative 2.0%).
Arguably REITs face more questions than at the start of last year. REIT valuations appear to be less supportive for outperformance today. At yearend, FFO multiples are about 14.4x, as compared to 14.1x 12 months earlier, while the 10-year yield is 70 basis points higher. Earnings growth projections for 2025 show little acceleration, although 2026 looks better. Current implied cap. rates are about 5.9%, which is only 130 basis points above the 10-year yield, compared to a long-term average of 200 to 300 basis points. Furthermore, transaction markets remain relatively constricted for most property types, limiting the opportunity for improved price discovery in the near-term. Additionally, several sectors continue to face elevated levels of new construction, and while this is expected to ease in late-2025 and 2026, it will take some time to clear excess inventory.
Analyst Expectations for REITs in 2025
REIT Analyst expectations for 2025 provide a range of potential performance results. We reviewed 2025 outlook reports from 11 investment banks, aggregating the expectations and sector calls from each, a summary of which is included as Exhibit A below. Overall, REIT analysts expect a total return of 9.5% in 2025, which roughly aligns with the long-term average of 10%. The range of total return targets for the analysts ranged from a low of 0% to a high of 15%. In terms of earnings growth, analysts forecast FFO / AFFO growth (each use different terminology) of 4.8%, within a range of estimates from 3.9% to 6%.
On the positive side, analysts noted that forward expectations are improving, such as lower levels of new supply deliveries beginning as we move through 2025 and accelerating earnings growth in 2026. Several also noted the steady economy as a supportive backdrop, with expectations that increasing transaction volume will both provide improved price discovery and opportunities for accretive growth for REITs with strong balance sheets. On the negative side, analysts noted the recent rise in the ten-year and uncertainty on the Federal Reserve’s path forward. Interestingly, analysts appear split on whether current valuations are supportive of, or a hindrance to, multiple expansion and better relative valuations.
Exhibit A: Summary of REIT Analyst Expectations for 2025
Sector Weightings for 2025
In terms of sector positioning, we summarize analyst preferences by property segment, which are provided below in Exhibit B. As a note, “1” represents Outperform / Overweight, “2” represents Market Perform / Equal Weight, and “3” represents Underperform / Underweight, so a lower average score for a sector indicates more favorable support.
Exhibit B: Analyst Sector Picks
Based on this summary, the most favored sectors are senior living, data centers, skilled nursing, single family rental and manufactured housing. We note that none of these property types are in the traditional core list of multifamily, industrial, office, retail or lodging, which suggests that analysts are trying to find more niche plays in the sector amid some general uncertainty and lack of enthusiasm. Given the unique secular growth opportunity for data centers amid the explosion in AI, the sector’s inclusion among the favorites is not surprising even after solid outperformance in 2024.
Sectors with the least support included medical office, self storage, malls, gaming and towers. Malls –which posted a solid rebound in 2024 as a value play – remain an underwhelming sector given continued rising ecommerce, threatening discretionary retail sales which are significant at most malls. We note with interest that office has moved out of the least-favorable REIT sectors. Analysts with a more favorable view cited a combination of factors, including stabilizing earnings trends, an accelerating “return-to-office” work model, expectations for reductions in supply from office demolitions / conversions, and “cheap” valuations.
Keys to Performance for Commercial Real Estate and REITs in 2025
As a summary, we note several expected drivers of relative performance in 2025 that will ultimately determine performance as they come into view. These comments reflect ICR’s views, not the views of the analysts discussed above.
- The Path of the Economy
Thus far, the U.S. economy has remained fairly steady, providing a level of support for REITs, particularly growth-driven sectors. GDP growth is expected to continue to grow modestly in the near term, averaging around 2% in 2025, driven by a mix of consumer spending, business investment, and government expenditure. Consumer spending, which accounts for approximately 70% of GDP, also continues to provide support despite concerns of a “stretched” consumer. Also, the labor market remains healthy, with unemployment hovering near recent lows, and job creation continuing, although at a more modest pace than during the post-pandemic rebound.
Despite this supportive backdrop, risks to the outlook are evident. Higher interest rates imposed by the Federal Reserve to curb inflation are impacting certain sectors, such as housing and durable goods, which could dampen overall growth prospects. Domestic fiscal policy is another uncertainty, as the direction of overall government spending under the new administration could affect public sector employment and infrastructure investment.
Ultimately, a stable and growing economy are positive for commercial real estate and REITs, although sectors that are more cyclical in nature (residential, office, industrial, lodging) tend to benefit more when growth is robust, as compared to more defensive sectors (healthcare, net lease.)
- Interest Rates and the Cost of Capital
2024 began amid expectations that the Federal Reserve would commence an easing cycle that would be supportive to yield-generating sectors like REITs. While the Fed did cut its target range for federal funds by 100 basis points during the year, REIT momentum in front of the expected cuts petered out once the easing cycle was underway – a classic example of “buy on the rumor, sell on the news.”
Looking ahead, we expect the central bank to adhere to a “wait-and-see” approach as conditions evolve. Currently, the market expects 1 to 2 interest rate cuts during the year, likely in the second half. This expectation stems from the anticipation that inflation will continue to moderate, allowing the Fed to maintain a more accommodative policy.
The outlook for the 10-year Treasury yield in 2025 is for it to remain elevated compared to historical norms, with yields expected to fluctuate between 3.5% and 4.0%. The obvious caveats to this outlook being economic growth expectations, inflation trends, and global capital flows. A 10-year Treasury yield within this range would be unlikely to drive significant increases in commercial real estate valuations but should be sufficient to provide reasonably priced debt capital to refinance most debt maturities and support continued normalization in the transaction markets. Given this backdrop, mortgage rates are expected to remain higher for most of the year, ranging between 6.5% and 7.5% for a 30-year fixed-rate mortgage.
- New Supply has Peaked.
The outlook for new supply in commercial real estate in 2025 varies across different property types. For industrial and multifamily, new construction has slowed from the peak, which should result in lower deliveries of new inventory by the second half of 2025, allowing the demand engines of both of these vibrant sectors to drive renewed increases in occupancy and rental rates. Retail is both a localized and property segment story. With ongoing challenges to large-format retailers, malls and big-box centers are likely to see little growth after CapEx, while strip centers should benefit from a lack of available high-quality space. In fact, given the dominance of the strip retail REITs’ involvement in development, we expect development to remain a secular benefit to growth for the sector.
- Transaction Markets & Cap Rates are Expected to be Stable.
Since interest rates commenced their sharp rise in 2021, commercial real estate transaction volumes have fallen continuously. After an estimated $540 billion in total transactions in 2024, transaction activity is expected to remain steady or rise slightly in 2025. This is typical of periods when the economic outlook or cost of capital environment shifts, and buyers recognize the changing landscape before sellers. By property type, the most active commercial real estate sectors in 2025 are likely to be industrial and multifamily which benefit from strong long-term demand fundamentals. Additionally, data centers are expected to see growth due to the rising demand for tech infrastructure and AI.
Cap rates are likely to remain relatively elevated in 2025 as compared to 2021 and 2022, reflecting the higher interest rate environment. As noted above, sectors with stronger underlying demand drivers (industrial and residential) may see cap rates dip as new construction eases and rent growth re-accelerates. Office and retail pricing will more likely reflect a case-by-case basis, depending on property and market conditions.
- Return to “In-Office” Work.
There is little doubt that that hybrid work will remain dominant for the foreseeable future, offering employees more choice and autonomy. As businesses continue to experiment with different models, both employers and employees will seek to optimize productivity, well-being, and work-life balance. However, we note an undercurrent of companies using a combination of “carrots and sticks” to encourage a return to in-office work, including Amazon, JP Morgan, and X (Twitter). How these companies balance the desire for greater productivity and collaboration with employee preferences for convenience and reduced commuting requirements will shape trends in 2025 and beyond, and provide a key loon into long-term demand for office space. Interestingly, so far in the slow recovery of office space in most markets, leasing activity is not rate-driven; rather, companies want quality space with access to amenities to enhance employee satisfaction.
- Government Policy Remains a Wild Card.
- Tariffs
President-elect Trump has a history of threatening actions as a negotiating tool. Mr. Trump’s tariffs during his first term were a key component of his “America First” trade policy, focusing on reducing trade deficits and re-shoring manufacturing jobs to the U.S. With his return to the presidency, tariff policy is likely to focus on expanding tariffs on China, particularly targeting sectors like technology, intellectual property rights, and manufacturing. The focus will be on protecting U.S. industries from foreign competition and bringing more manufacturing back to the U.S. through tariffs and / or tax incentives for domestic production. Additionally, the President-elect is expected to focus on countries with whom the U.S. has had a persistent negative trade balance, such as Germany, Japan, and South Korea. Mr. Trump has also raised the specter of tariffs with friends and allies, such as Canada and the European Union, to negotiate benefits to the U.S.
Tariffs raise risks on overall commercial activity and trade, so it will depend on how, when and if they are applied. The most obvious risk to commercial real estate could be a reduction in overall import / export activity, lowering port activity and, potentially, demand for industrial space.
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- Immigration
Probably the President-elect’s most notable promise was his plan to deport illegal immigrants aggressively. His proposal to complete the construction of a border wall along the U.S.-Mexico border is not new but will face ongoing congressional opposition from Democrats as he seeks funding for necessary materials and resources. Additionally, President-elect Trump plans to halt “catch-and-release” and accelerate deportations of detainees. In executing this policy, a Trump administration faces challenges with identifying illegal migrants that are the target of deportation, ensuring home-country acceptance of deportees, hostile sanctuary city policies, and potentially negative publicity on family separation and forced internment.
As an economic impact, a reduction in the number of immigrants could result in labor shortages in certain regions and activities, particularly impacting agriculture, construction, and food service.
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- Taxes and Regulations
Republicans have generally stated their plans to advance a more pro-business tax and regulatory environment. A reduction in corporate tax rates – or continuation of the rates set in Mr. Trump’s first term – would provide little or no direct benefit to REITs, as they are effectively shielded from corporate taxes via the REIT structure. However, his proposals to simplify the tax code and reduce overall regulations could remove impediments to growth, which would benefit the overall economy, employment and profits, which would be favorable to commercial real estate, particularly more cyclical sectors such as office, industrial, residential and lodging.
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- DOGE
The Department of Government Efficiency (“DOGE”) could have a profound impact on both the federal workforce and the federal budget. On the positive side, DOGE could have significant and far-reaching effects on both the federal workforce and the federal budget. By streamlining operations, improving management practices, and eliminating wasteful spending, DOGE could generate long-term cost savings, reduce the federal deficit, and ensure that taxpayer dollars are used more effectively.
However, achieving these goals would require overcoming resistance to change, navigating political challenges, and making substantial upfront investments in technology and training. Additionally, significant reductions in the federal workforce could lead to greater economic uncertainty and unused office space, undercutting office fundamentals, primarily in Washington, D.C., and other areas of significant federal employment. In any event, DOGE will be a test of an irresistible force versus an unmovable object.
Bring on 2025!
Commercial real estate has navigated a series of challenges over the last three years, with rising and elevated interest rates, inflationary pressures, relatively high levels of new supply, and adaptations to new demand patterns in a post-COVID world. Given where the cost of capital currently ranges, a material compression in cap rates appears unlikely. However, as we enter 2025, fundamentals appear to have stabilized, providing a potential base for renewed growth.
For REITs, with high-quality portfolios, significant market presence, and fortress balance sheets, signs of growth are likely to generate additional accretive growth opportunities. For higher-demand sectors such as residential and industrial, we would expect these opportunities to evolve as we move through the year. Other sectors could also start to see incremental improvement on a localized or company-specific basis and could benefit from an increase in M&A activity. While the likely drivers of recovery for commercial real estate and REITs are identifiable, 2025 still faces several “known-unknowns,” which will determine the group’s ultimate performance and could result in a year that requires companies to demonstrate an ability to stand apart from their peers in order to outperform.
For more 2024 trends in sectors from energy and investor access to healthcare, visit the ICR Insights blog.
