Written by: Sari Mira
At the start of 2024, uncertainty dominated the Commercial Real Estate (CRE) sector. Inflation was soaring, and Asset Managers were unsure whether their tenants would be renewing their leases, amongst other competing market concerns. This uncertainty was most visible in the lack of investments in office spaces where the building occupancy has been affected by the work-from-home (WFH) structure the most in contrast with stronger sectors such as biotech.
As consultants and outreach professionals in the CRE sector, Waypoint Energy experienced this hesitation first-hand as we guided our clients through their decision-making process and energy management strategies throughout 2024. As the year progressed, one thing became apparent: optimism began to grow in the CRE sector as hesitation slowly lifted throughout the year. This paints a positive picture of the industry’s state for 2025. Nevertheless, this would simply be speculation if not backed by data!
In this article, we’ll take a look at the data, analyses of the data, and educated projections as we go into 2025 with a focus on the USA CRE market and its impact on energy management decisions.
Deloitte issued its annual state of the market report titled “2025 Commercial Real Estate Outlook” in September, 2024. The data accumulated for this report was based on surveying subject matter experts globally. The first data point reported was that 88% of respondents were projecting an increase in their company’s revenue in 2025, compared with 34% in the 2024 outlook report; a decision fueled in part by the dramatic decrease in the overall inflation rate from 9.1% in 2022 to 2.5% in August, 2024 (U.S. Bureau of Labor Statistics). Similarly, the respondents expected improvements across the various property sectors with the industrial and multi-family capital markets having the strongest outlooks of the traditional markets while there was a more cautious optimism when it comes to the office market. One outlier was the “Alternatives” market which showed the strongest growth projections for 2025, where sub-segments such as data centers dominate the new construction and major renovations markets (Counselors of Real Estate: Top Ten Issues Affecting Real Estate).
When it comes to the environmental aspect of Environment, Social, and Governance (ESG) initiatives, 46% of respondents stated that sustainability-driven decisions will either be a core business strategy or ROI-focused in 2025 with the remaining 56% being split between taking a balanced approach (41%) and being compliance-driven (13%). Similarly, 63% of respondents stated that the building’s energy performance standards will be considered in the due diligence of a property’s sale or lease “to a very high extent”; taking a heavier weight on the factors influencing asset transactions.
Looking specifically at the office market, market analyses conducted by Colliers, CBRE, Nuveen, and VTS aggregately show a slow but positive outlook of the office market within the CRE sector. The quarterly VTS Office Demand Index (VODI) is a measure of office occupancy and consequent office building demand as a percentage of a pre-pandemic baseline. The VODI averages the demand during the 8 quarters in 2018-2019 to establish the pre-pandemic baseline. As of September, 2024, the overall US VODI was on an upward trend landing at 57%; up 7% from the same time in 2023.
To summarize this brief article in a few words: the CRE sector is very optimistic about its position in 2025 while the office submarket, though still optimistic, is gaining momentum much slower than its CRE counterparts. We at Waypoint Energy will continue to closely monitor the CRE sector, with a closer lens on the office market, so we can provide our customers with insightful energy management strategies and sector guidance through an ever-shifting industry.
For more information, reach out to us at info@waypoint-energy.com