Costs and external risks are at the forefront for US CRE professionals in 2025

Taking stock of risks for the US CRE industry

Commercial real estate professionals are making strategic decisions to buy, sell, or hold assets in a dynamic market that is increasingly fraught with risks ranging from tenant retention and supply chain disruption to a changing climate and geopolitical landscape.

Altus Group’s Q4 US Commercial Real Estate Industry Conditions and Sentiment Survey (ICSS) captures sentiment on what real estate investors view as priority issues over the next 12 months. It’s no surprise that capital costs/interest rates remain the #1 priority. The “higher for longer” rate environment is clearly frustrating to an industry that is heavily dependent on debt and equity financing to drive deal-making.

The ICSS also tracks notable shifts in sentiment on key issues on a QoQ and YoY basis, with some concerns rising more to the forefront, while other concerns appear to be easing. The magnitude of quarter-over-quarter and year-over-year shifts in survey results gives us some clues on what real estate professionals are thinking, which is that they appear more concerned about exogenous risks that may seem out of their control.

Costs remain top priority

Investors remain keenly focused on costs. Capital costs, insurance costs, and operating costs were rated as the top three priority issues over the next 12 months. However, it is worth noting that some of the fears related to capital costs and access to capital appear to be easing.

Figure 1 – Priority issues over the next 12 months

Although capital costs/interest rates remained the number one concern for 49% of respondents, sentiment has improved significantly, dropping from 60% who thought it was a top issue in the previous quarter and 71% a year ago. That pullback was likely influenced by the start of Fed rate cuts, which kicked off in September with a 50 basis point reduction. The survey results may reflect one of two things – either that respondents expect capital costs to come down further, or they expect to find more ways to process high capital costs, thus finding more ways for deals to pencil out.

For context, research was conducted between October 9 and November 5. So, survey results capture the initial rate cut and optimism that the Fed was starting a rate easing cycle. At the same time, the fact that it remains a top priority likely reflects the uncertainty surrounding the path of future rate cuts. Fed Chair Jerome Powell has already walked back earlier comments, now indicating that the Fed is likely to follow a slower path.

Insurance costs moved higher on the priority list, with the share of respondents citing the issue climbing from 43% a year ago to 48% in the Q4 survey to rank as the #2 concern. That move is likely a result of the sharp spikes in insurance premiums owners have already experienced over the past two years, combined with concerns that premiums could rise further following another year of extreme weather events.

Coming in at the #3 issue, the 42% who ranked operating costs as a top priority is consistent with the Q4 2023 survey, but it does show improvement from the previous quarter where nearly half of respondents rated it a top priority. On a positive note, one item that waned as a concern is construction costs, which has declined from 43% who rated it as a top priority a year ago to 30% in the most recent survey.

Big swings in sentiment

Topping the list of issues that moved up in level of concern were geopolitical risk, supply chain disruption, natural disasters, economic growth, and taxes. Geopolitical risk posted the largest quarterly increase (+15%). Other external risks also grew quarter-over-quarter, including supply chain disruptions (+9%), natural disasters/weather risk (+9%), and economic growth concerns (+8%). Respondent attitudes indicate that their concerns for CRE are shifting toward issues they do not have control over. Many of these concerns are emblematic of general uncertainty and likely to have been influenced by the survey timing, which again was just ahead of the Nov. 5th presidential election. Concerns related to supply chain disruption specifically may have been influenced by President Trump’s campaign focus on higher tariffs.

Figure 2 – Change since Q3 2024

When looking at shifting sentiment on a YoY basis, the two issues that saw the biggest increase were natural disasters/weather risk (+18%) and insurance costs (+15%). The two are highly correlated and the move higher also is not surprising given the increasing frequency and severity of climate-related extreme weather events, including hurricanes, flooding, wildfires, and even extreme heat. In 2024, there were over two dozen weather-related disaster events that produced losses exceeding $1 billion. Hurricane Milton, which hit in October, was the single most costly event last year, causing an estimated minimum of $60 billion in damage. Property damage caused by the Southern California wildfires in January are expected to place even more upward pressure on insurance costs.

Figure 3 – Change since Q4 2023

Improving outlook for credit, inflation

On the other end of the spectrum, those issues that saw bigger declines in concern were related to cost of capital/interest rates and capital/credit availability. What is notable is that both issues saw big declines on both a quarterly and annual basis. Cost of capital/interest rates is still the #1 priority as rated by 49% of survey respondents. However, the percentage who view it as a top priority dropped 23 percentage points from Q4 2023 and 12 percentage points from the Q3 2024 survey. Worries about capital/credit availability also showed marked improvement, dropping from 52% a year ago and 47% in Q3 to 34% in the Q4 survey.

Overall, the Q4 perspective on top priorities in the coming year reflect market uncertainty that was prevalent leading up to the US presidential election. The market is anticipating key moves on tariffs, taxes, regulation, energy, and international relations, all of which could create ripple effects for the direction of the economy and monetary policy. Altus will continue to keep its finger on the pulse of CRE sentiment with its quarterly ICSS research.

Download a full copy of the Q4 2024 report

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