As we enter the second half of 2025, our outlook for the commercial real estate market remains consistent -- 2025 will likely present compelling opportunities across various commercial real estate sectors.
Despite a sluggish near-term economic backdrop, marked by moderating interest rates, easing inflation, and tepid GDP growth, commercial real estate is showing signs of resilience thanks to strong sector-specific fundamentals.
The NCREIF ODCE Index has now posted three consecutive quarters of positive performance, rising 2.5% from its low.1 This sustained rebound follows a nearly 19% pullback driven by surging interest rates. As values begin to stabilize, the compelling entry point outlined in our 2025 outlook [link to report] appears to be materializing. Historically, such brief corrections in high-quality real estate have presented opportunities for investors to capture returns by entering near the trough.
NFI-ODCE Index (Log Scale)1
Both employment and productivity growth continue to face challenges. The country’s low birth rate and aging population suggest that even with a very low unemployment rate going forward, employment growth may only contribute approximately 0.3% to GDP, compared to the 0.8% contribution from 2008 to 2019.2 Productivity growth continues to experience a gradual decline, which is typical in aging nations with large debt loads, particularly when debt-to-GDP reaches somewhere between 75% and 100%.3 As of Q1 2025, the U.S. debt-to-GDP ratio stood at 121%.4
Net Domestic Income to U.S. GDP & Productivity Growth5
Given these factors, we expect real GDP growth to remain at 0.75% to 2.25% annually, with a midpoint of 1.50%.
As of June 2025, the Consumer Price Index (CPI) excluding shelter sits at 2.0%. Headline CPI continues its deceleration, reaching 2.7%, slightly higher than the prior months due to modest tariff and geopolitical pressures, particularly seen in food and energy prices.6 However, this number may be overstated due to how shelter costs are measured, as the shelter component lags actual changes in rent significantly. Removing it gives a clearer picture of real-time inflation. We expect headline CPI to remain low and decline further over time, despite volatility due to trade policy.
Interest rates at both the short end of the curve (controlled by the Federal Reserve) and the long end, driven by nominal GDP growth, will be impacted by these conditions. This is starting to unfold, with the 10-Year Treasury rate easing to around 4.4%, down from its January peak of 4.8%.7
10-Year Nominal GDP Growth & 10-Year U.S. Treasury8
We expect the Federal Reserve will likely cut rates further toward the end of the year as growth and inflation continue to show weakness. Over the long run, we expect long-term rates to track GDP growth, as can be seen in the chart above.
With valuation declines reversing, demographic shifts reshaping demand, and strong demographic tailwinds among other factors, we believe the outlook for the commercial real estate market remains promising. These dynamics suggest that the second half of 2025 could be a defining period for the commercial real estate industry. We will continue to carefully watch these evolving trends to identify resilient strategies that have the potential to capture long-term value in an ever-changing economic landscape.
Sources:
1 NCREIF NFI-ODCE Index
2 Fred GDPC1
3 https://www.mercatus.org/research/policy-briefs/debt-and-growth-decade-studies#:~:text=Using%20the%20World%20Bank’s%20World,than%20the%2030%20percent%20level
4 U.S. Office of Management and Budget and Federal Reserve Bank of St. Louis, Federal Debt: Total Public Debt as Percent of Gross Domestic Product [GFDEGDQ188S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GFDEGDQ188S, June 12, 2025
5 FRED – Net Domestic Investment (W171RC1Q027SBEA) / GDP (GDP) & Labor Productivity (PRS85006092)
6 FRED CPI: Shelter (CUSR0000SAH1) & RealPage Effective Rent Growth YoY
7 U.S. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDP, Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS10
8 FRED – Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis (GS10) & Gross Domestic Product (GDP)
9 Realpage Data Subscription
10 Green Street Advisors Data Subscription
11 RealPage Data Subscription
12 https://www.forbes.com/sites/markcperna/2025/01/28/new-data-reveals-the-depth-of-college-crisis/
13 https://www.kingseducation.com/kings-life/best-cities-for-international-students-in-usa
14 Worldbank.org – Population Estimates and Projections – 2024
15 JLL – 2025 Medical Outpatient Building Perspective; Healthcare Realty – Investor Presentation
Opinions expressed reflect the current opinions of Inland Real Estate Investment Corporation of the date appearing in the materials only and are based on Inland Real Estate Investment Corporation’s opinions of the current market environment, which is subject to change. Investors, financial professionals and prospective investors should not rely solely upon the information presented when making an investment decision and should review the most recent offering materials for the applicable investment program. Certain information contained in the materials discusses general market activity, industry or sector trends, or other broadbased economic, market or political conditions