The commercial real estate sector stands at a crucial juncture, showing early signs of recovery after a prolonged downturn. PIMCO experts recently discussed the market’s future, highlighting a selective and uneven recovery driven by falling interest rates and a renewed focus on specific segments and regions.
The current outlook: recovery signals for 2025
John Murray, Managing Director at PIMCO, notes the first signs of improvement, especially in the multifamily sector, with open-end core fund redemption requests slowing down. However, the 2025 recovery won’t mirror the post-global financial crisis bounce-back. Capitalization rates will remain high compared to 2021, leading to a gradual and strategic thaw.
Russell Gannaway, Managing Director at PIMCO, predicts increased activity, with public markets ahead in recovery compared to private ones. Real estate investment funds and CMBS valuations are nearing pre-pandemic levels, signaling potential for private market recovery.
Europe, Asia, and emerging sectors
François Trausch, CEO of PIMCO Prime Real Estate, points out that while interest rates in Europe will drop, they won’t return to historically low levels. Investors should focus on growth areas with increasing net operating income and rental rates. In Asia, excluding China, faster recovery is expected, while Europe, particularly Germany and France, faces slow growth.
Seray Incoglu, Executive Vice President at PIMCO, highlights the resilience of Class A properties, while Class B and C assets may face additional challenges. Default rates in commercial real estate loans are rising, creating opportunities in the credit space.
Investment opportunities: debt and equity
According to Murray, 2025 offers intriguing opportunities for credit providers, particularly in rescue capital and gap financing. The equity market also presents more attractive entry points compared to six months ago, provided investors adopt a selective and disciplined approach.
The residential sector remains a cornerstone for investors, as Gannaway emphasizes, driven by robust supply-demand dynamics, especially in the U.S. Sun Belt. Trausch points to Japan’s multifamily segment and student housing globally as areas with promising growth.
Key sectors and emerging risks
While data centers remain a top investment priority, the life sciences sector is slowing due to reduced leasing demand. Experts advise caution, particularly in sectors requiring significant transformation to remain competitive.
Analysts believe the market overestimates the positive impact of rate cuts while underestimating pressures from capital requirements, which constrain bank lending.
Final thoughts: preparing for 2025
PIMCO experts agree on the need for a flexible, informed approach. Strategic investments across the capital structure, balancing equity and debt in both public and private markets, will be key to capturing value in an evolving landscape.
