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By Brady Mick, ASI Leader of Strategic Design

What's on the CRE Economic Agenda for 2025?

Each month, the Indiana-Kentucky-Ohio CoreNet Global chapter hosts a thirty-minute Coffee Chat, spotlighting insights from a leading expert in the real estate industry. On January 8, we were thrilled to welcome Alec Pacella, whose engaging presentation was so impactful that the session ran an additional fifteen minutes—without a single attendee logging off. Alec, a distinguished leader in commercial real estate and president of NAI Pleasant Valley, brings a wealth of experience with over $500 million in closed transactions and decades of expertise in brokerage, valuation, and market strategy. His insights offered much-needed clarity on today’s market volatility and delivered a compelling outlook for the commercial real estate (CRE) market in 2025.

The 2025 CRE landscape presents a complex blend of opportunities and challenges spanning industrial, retail, and office sectors. During the Coffee Chat, Alec took a deep dive into the tangible economic factors shaping these sectors, offering a detailed analysis of data and trends that are set to influence real estate decisions in the year ahead. His expert perspective not only illuminated the current market dynamics but also provided actionable insights for CRE professionals looking to navigate the evolving landscape. Here’s an in-depth look at the key takeaways from the discussion.

Industrial Sector: Resilient but Cautious

Pacella began with the industrial sector, a cornerstone of CRE markets that has shown remarkable resilience in recent years. According to his analysis, industrial real estate remains strong, albeit with cautionary signs emerging. Metrics such as vacancy rates, construction slowdowns, and demand fluctuation point to a sector that has reached a state of equilibrium but could face challenges if oversupply and declining demand persist.

1. Vacancy Trends: After years of extremely tight vacancy rates, which left expanding businesses scrambling for space, the market has seen a moderate increase in vacancies. This shift offers companies more options, but it also signals a potential cooling in industrial demand.
2. Construction Slowdown: A significant reduction in new construction reflects a recalibration of supply to match demand. Pacella noted that 2025 could see a 50% decrease in industrial construction compared to 2023.
3. Regional Dynamics: The Midwest, heavily reliant on auto manufacturing, remains stable as long as vehicle sales hover around 15–16 million annually. However, certain markets, like Austin and Dallas, are experiencing oversupply, creating localized vulnerabilities.

While the sector’s fundamentals remain sound, Pacella emphasized the need for vigilance, particularly in monitoring supply-demand balances and regional variations.

Retail Sector: A Tale of Two Worlds

The retail landscape is the most polarizing, with Pacella describing it as both an "in" and "out" sector depending on specific market dynamics.

1. Consumer Spending Resilience: Despite inflationary pressures, retail sales have continued to rise, demonstrating the enduring strength of consumer demand. Pacella highlighted this as a key reason for optimism in retail.
2. E-commerce Growth: Online retail continues to eat into the brick-and-mortar market share. The pandemic accelerated this trend, and it remains a challenge for physical stores to adapt to the shifting consumer landscape.
3. Right-Sizing and Closures: High-profile closures, such as Walgreens, CVS, and Big Lots, underscore the challenges facing retailers. While some may interpret these as market corrections, they contribute to uncertainty about the sector’s long-term trajectory.

Pacella underscored the importance of adapting to these shifts, with retail spaces increasingly repurposed for alternative uses, such as medical facilities or experiential concepts. The sector’s evolution hinges on blending physical and digital experiences to remain relevant in a competitive environment.

Office Sector: Redefining "Normal"

Perhaps the most challenged sector, the office market faces continued headwinds as businesses adapt to hybrid work models and right-size their footprints.

1. Occupancy Trends: According to Pacella, office occupancy rates have plateaued at around 64%, reflecting the new normal of three days in-office and two days remote for many companies. While this hybrid model offers stability, it limits growth potential for office space demand.
2. Rising Vacancies and Declining Rents: Vacancy rates in several Midwest markets have edged toward 7–9%, prompting landlords to lower rents to attract tenants. This trend poses challenges for CRE professionals navigating a highly competitive market.
3. Distress in the Sector: Alarmingly, office loan delinquency rates have reached record highs, surpassing levels seen during the Great Recession. This highlights the financial strain on landlords and investors as they grapple with shifting market dynamics.

Despite these challenges, Pacella noted some bright spots, such as suburban office markets performing better than urban central business districts (CBDs). Employers are also increasingly mandating partial returns to the office, which could stabilize the sector over time.

Macro-Economic Indicators

Pacella’s broader economic overview provided context for the CRE landscape:

• Consumer Price Index (CPI): Inflation is expected to stabilize at around 2–2.5% in 2025, a welcome respite after years of volatility.
• Gross Domestic Product (GDP): Moderate GDP growth is anticipated, though ongoing tariff debates and federal fiscal policies remain wild cards that could impact CRE markets.
• Federal Reserve Actions: The Fed’s projected rate cuts of 50 basis points in 2025 signal a cautious approach to economic management, but Treasury yields moving counter to these cuts reflect market uncertainty.

The Role of Design in CRE's Future

One of the discussion’s most thought-provoking moments came when Pacella and the audience explored the role of intangibles in CRE. Design emerged as a crucial factor in shaping the future of real estate, particularly in office and mixed-use developments. As Pacella noted, successful markets often integrate cultural and experiential elements to attract people and foster vibrant communities.

For instance, in Indianapolis, mixed-use developments combining residential, entertainment, and retail spaces are thriving. This underscores the importance of leveraging design to create environments where people want to live, work, and play. It’s a reminder that beyond metrics and data, the human element remains central to CRE success.

Predictions for 2025

Pacella concluded with a forward-looking perspective:

• Industrial: Continued strength with pockets of caution due to oversupply risks.
• Retail: A nuanced outlook, with resilient consumer spending offset by the ongoing rise of e-commerce and store closures.
• Office: Stabilization in occupancy rates but persistent financial and structural challenges.

While no one can predict the future with certainty, Pacella’s insights offer a roadmap for navigating 2025’s complexities. For CRE professionals, the challenge will be to balance tangible economic realities with the intangible elements of design and community-building that define valuable and human centric real estate.