Periods of major market disruption only come around a handful of times during most CRE investment careers. However, most investors know from experience that these episodes provide rare windows of opportunity to capitalize both on dislocations in pricing and on downshifts in speculative development that eventually set the stage for income growth as new cycles take shape. Cushman & Wakefield’s latest Tide is Turning piece takes a closer look at both pricing and supply-side dynamics, which now collectively provide investors with cause for conviction to selectively and creatively deploy capital in 2025 despite the increasingly complex and uncertain macro environment.
Contextualizing the Reset
It is not hyperbolic to characterize the latest decline in U.S. commercial property values as a generational reset. Most industry benchmark indices show aggregate U.S. CRE pricing down anywhere from 13-21% from their mid-2022 peak. Aggregate CRE valuations endured steeper declines in only two other periods over the last forty years, the early 1990s and the Great Financial Crisis.
Both periods ushered in significant surges in 7- and 10-year price appreciation, marking dramatic accelerations in growth. In both cases, the strength of those rebounds generated significantly higher 7- and 10-year pricing gains than those achieved on investments made anytime within the five years prior to each correction.
Rapid CRE price appreciation rarely lasts in perpetuity as it incentivizes overbuilding, which detracts from occupancy and rent performance. But steep property price declines also prove naturally self-defeating; by expanding cap rates and curtailing future construction, pricing declines tend to lay durable foundations for sustainable periods of accelerated appreciation. U.S. CRE markets appear to be emerging from this very cyclical dynamic in 2025, providing investors with a compelling entry point for new investment.
Cross-Sector Perspectives on the Reset
While the recalibration process to higher interest rates has been universal across CRE capital markets, the scope of the adjustment process has varied on a cross-sector basis given differentiated sector-specific risk spreads, fundamentals and investor attitudes.
The charts above feature cross-source, cross-sector pricing declines from each of their respective pre-rate hiking cycle peaks. Apartment, office, and, to a lesser extent, retail pricing have yet to fully recover from their rate-hiking cycle adjustments. The industrial sector, meanwhile, witnessed a much shallower reset and swifter pricing recovery buttressed by investors’ desire to diversify further into the sector, which is still considered to offer strong longer-term secular tailwinds and opportunities to realize outsized NOI growth by bringing leases to market.
Supply-side Insulation in an Era of Structurally Higher Uncertainty
Adjusted pricing alone may not be enough to provide investors with the conviction to act in this uncertain environment. However, this historically deep pricing decline has also followed a period of rapidly rising construction costs; a dynamic that has already begun to significantly curtail speculative development across property types and will likely continue doing so in the years ahead.
As the rate-hiking cycle progressed, CRE fundamentals for both the apartment and industrial sectors also had to contend with historic, cyclical waves of new supply; those waves have since crested and both sectors are now witnessing dramatically lower construction pipelines. Trailing 12-month U.S. multifamily construction starts are down more than 60% since their 2022 peak and are at the lowest levels recorded since 2012. Industrial construction activity is also down by more than 60% from its peak, with just 1.5% of existing inventory under construction today.
In addition to cyclically lower construction pipelines, many properties are selling today at pricing below what it would cost to build a comparable building. Since the start of the pandemic, apartment construction costs have risen by more than 35%. Apartment sales pricing achieved a similar gain from 2020-2022, but due to interest rate increases in the years after and the CRE pricing correction that it caused in 2023 and 2024, apartment sales pricing is only up about 14% cumulatively over the past five years. This dynamic— partment property values trailing well behind construction costs—is not sustainable given the nationwide housing shortage and should lead to accelerated rent and value growth in the apartment sector over the long-term.
Construction costs for office properties have also risen more than 45% since the start of the pandemic while sales pricing of office buildings has fallen by 12% over the same period. A gap this wide will ultimately mean very little new office construction and a large number of older buildings being demolished or converted to other uses. With office occupancies no longer declining, even in the CBDs of cities hardest hit by the rise of work-from-home like New York and San Francisco, lack of new office supply will eventually mean shortages of high-end office space and ultimately accelerated growth in rents and property sale prices.
Thanks to the sector’s exceptionally strong NOI growth in recent years, industrial property price growth has kept pace with construction cost increases since 2020. However, even in this sector, higher interest rates and a record wave of new projects competing to lease up has pushed construction starts to the lowest levels recorded in 10 years.
Finally, while time series data on retail construction costs remains limited, growth in the stock of U.S. retail space has not surpassed an annualized rate of 0.4% in more than five years and is unlikely to dramatically accelerate for the foreseeable future.
