CRE Year in Review

It’s been a tumultuous year for commercial real estate. But as industry veterans at Voit constantly remind us, we’ve been here before and have always come out on the other side. There were several jarring disruptions to the market in 2025, most notably the radical change in U.S. tariff policy and the government shutdown. But there were also some positive developments, such as the long-awaited reduction in the Federal Reserve’s benchmark interest rates.

Let’s look at some of the events and trends that shaped the commercial real estate industry in 2025.

Tariffs

Shortly after his inauguration, President Trump revamped U.S. tariff policy by imposing tariffs on some of the U.S.’s largest trading partners, including Canada, Mexico, and China. Tariff rates accelerated on “Liberation Day” in April, and by midyear, the effective tariff rate was approximately four times higher compared to the historical quarterly average during the 30-year period from 1995 to 2024, according to Moody’s. Despite some concessions in later months, the overall average effective U.S. tariff rate remains at a historically high level, currently estimated at around 17.0–18.0% —the highest rate seen in the U.S. since the 1930s.

The tariffs increased construction costs. Tariffs on materials such as steel, aluminum, and copper rose by as much as 50%, driving up overall building expenses and straining developers’ budgets. The tariff increases led to numerous project delays and pauses, as higher costs and supply chain disruptions forced developers to halt projects altogether. Tariffs had an outsized impact on the industrial sector, with vacancies increasing year over year in most markets as U.S. manufacturers reduced operations, slowed hiring, and cut jobs.

While Moody’s noted that causation related to tariffs is too strong a conclusion, the correlation is clear: “Some West Coast industrial markets have experienced performance deterioration that significantly exceeds that of the national average.” According to Voit’s Q3 Industrial market reports, the Orange County and San Diego markets experienced a nearly 30% year-over-year increase in vacancy, while the Inland Empire saw a 10% increase.

One positive aspect of the tariffs is beginning to emerge. According to offshoring consulting firm Gallagher & Mohan, “manufacturers, driven by both economic incentives and national security priorities, are increasingly redistributing supply chains closer to home.… While these trends predate the current administration— bolstered by the 2022 CHIPS Act and Inflation Reduction Act—the recent tariff escalation has accelerated the movement. The question now isn’t if reshoring will impact industrial real estate, but where and how significantly,” they write in their report.

How long the tariffs will remain in place is unclear. The U.S. Supreme Court is currently evaluating the legality of the administration’s decision to impose sweeping tariffs under the International Economic Emergency Powers Act (IEEPA). A ruling is expected in early 2026. Should the tariffs be revoked, several alternative legal pathways remain available to the Trump administration. They may reimplement tariffs under Section 122 of the Trade Act of 1974 to maintain 15% tariffs for 150 days while they develop more durable alternatives.

The Shutdown

When President Trump signed a bill to fund the government through the end of January, it marked the longest government shutdown in American history. The six-week shutdown cost the economy an estimated $11 billion in permanent losses. There were numerous disruptions across the CRE industry, including tax credit processing, SBA lending, and agency approvals, which stalled deals and construction schedules and left stakeholders more cautious about relying on those pipelines in the future, especially since another shutdown may be coming in January.

The shutdown also delayed the release of data that investors use to make decisions, including GDP estimates, inflation data, and the Consumer Price Index (CPI). Here’s a schedule from Investopedia detailing when the delayed reports will be released.

Interest Rate Cuts

The Federal Reserve has cut interest rates three times since December 2024, bringing the federal funds rate to 3.50–3.75%. An additional 25-basis-point rate cut is expected in the first quarter of 2026. While this is an encouraging trend, investor reaction has been relatively tepid.

In a November post published by WealthManagement.com, Stephen A. Sobin, president of Select Commercial Funding LLC, explained that it’s because “commercial mortgages aren’t priced off the Fed funds rate. They’re priced off longer-term Treasuries, and those yields reflect market expectations about inflation, economic growth, and the government’s borrowing needs. Currently, bond markets indicate they’re not convinced inflation is entirely under control, and they’re demanding compensation for this uncertainty.”

“The real stress point isn’t new acquisitions, it’s existing debt coming due. Nearly $1 trillion in commercial real estate loans will mature over the next few quarters, forcing property owners to refinance at much higher rates.”

CRE data analytics firm Lightbox offered this assessment of the latest rate reduction: “The cut offers modest relief but doesn’t shift CRE out of its higher-for-longer reality. Floating rate borrowers may benefit, but lender caution and volatile long-term yields continue to limit deal activity. So, while the rate cut was positive for equities markets, the effect on CRE isn’t so clear and might not be for many months. This means that borrowing costs will remain elevated longer than many CRE owners hoped.”

Although the Federal Reserve’s rate reductions won’t solve the $1.26 trillion in commercial real estate loans set to mature through 2027, there is encouraging news in lending for investors who have adjusted to the current financing environment. According to a November Bisnow article, “commercial real estate debt issued by banks is up 85% compared to last year, reaching $227B, roughly in line with 2019 levels.”