It is hard to believe 2024 is about wrapped up, and here comes 2025.  Here are some thoughts and also where I think things are headed, all of which centers around my suggestion for the real estate industry to adopt the mantra – my phrase: Be Overpaid For Risk.

Before I discuss my predictions for 2025, I have a few general thoughts and suggestions for the real estate industry.

  • Interest Rates & Inflation: I suggest that the real estate world should end its myopia that future predictions of interest rates matter so much.  Yes, interest rates do partially dictate the current pricing of a real estate asset; however, in my view, attempting to predict the future of interest rates is not a worthwhile pastime.  Sorry if this is too outspoken, but if a real estate business’s upside is based on its success in predicting future interest rates, then the chances that it will succeed over a long-term basis are quite low.  It is really just a version of market timing.  Warren Buffett has famously said that he would not make a single different investment decision if he knew everything the Fed was doing or would do.  He invests agnostically to interest rates, and I suggest that real estate players do the same, one way or another. 

    Also, on this issue, I think it is also high time for the real estate world to recognize that inflation and high interest rates are not necessarily a problem. Real estate has always – except for the past bunch of years – been thought of as a “hedge against inflation.” I urge the real estate world to remember this, and before dismissing my thought, consider what would happen if the deficit truly turned into Armageddon and brought on hyperinflation; where would everyone want to be? In real estate, of course, i.e., hard assets. If you follow my thinking, we have a strong and maybe even booming economy with unleashed so-called animal spirits. What better predicate could there possibly be for canny real estate investors to create upside and Be Overpaid for Risk?
     
  • Ignore Upcoming Macro Events:  A view that I hear consistently is that there will be clarity and an ability to make more intelligent investment decisions after some upcoming macro event.  A year-ish ago, it was about whether and when the Fed would raise – or lower – interest rates.  As soon as we know that, then….  Then, it was the upcoming election.  As soon as we know that, then….  Now it is what will happen when Trump takes over in January, then….. It is always something in the future that, once it happens, will supposedly provide clarity.  The answer here is simple – things will never be clear, and even if things seem clear, they are probably actually less clear.  Accordingly, real estate players should ignore these future and just do business with solid underwriting and the like.
     
  • Diversification: As I get older, I realize how incompetent I am in making predictions. Many times, I feel sure that I am right about something, but it just doesn’t turn out that way. In making predictions, and relying on them, our brains are our worst enemy as, in attempting to make us feel good, our brains remember when we were right but conveniently forget when we were wrong. We all have to make predictions one way or another to survive, but like it or not, we really don’t know what is going to happen. If we truly internalize this inability, my thesis is that it will lead us to the view that the optimal real estate investment strategy is diversification. The diversification would be as, well, diverse, as possible, including:
     
    • Geographic – not only different cities but different types of locations (i.e., cities and non-cities)
    • Product type – retail, industrial, office, multifamily, niche, etc.
    • Investment profile – i.e., where in the capital stack
    • Debt and equity
    • Whatever else you can think of


Now, here are my predictions for 2025:

  1. The Real Estate Industry Will Be Very Active: The real estate world is ready to do business again.  This means I believe there will be a great deal of activity in 2025. Lenders will lend and borrowers will borrow. Buyers will buy and sellers will sell.  Troubled deals will be restructured.  Even development will start up again.  Those who waited over the past couple of years will be annoyed they didn’t get the bargains they could have.
     
  2. Distressed Real Estate Opportunities Will Be Fewer Than Expected:  I have said in each real estate downturn that there will be a lot fewer opportunities for those with capital to make a killing based on the distress of others in the market.  And this time around is no exception. Since I have written on this before, I won’t overdo it except to say that the reasons for the paucity of distressed real estate opportunities are the following:
    • The existing parties in a distressed deal are not dumb and will try to take as little expensive capital as possible.  Unless they truly have zero alternatives, one of the existing players in the distressed deal will likely provide the high-yield capital.
    • If no one in the deal can do that, those existing parties are unlikely to take capital that is so expensive that they really have no upside left and are being underpaid for risk. Accordingly, their optimal strategy is often just to walk away or give it to the bank. Admittedly, sometimes one can buy it from a bank cheaply, but banks have figured that out and often come up with ways to hold the property until the markets change.  
    • If there really is a distressed opportunity – i.e., a chance to put money to work at 20% – someone else will likely offer 19% – and then someone else 18% – until the price of the capital equilibrates to the point where the investor is no longer being Overpaid for Risk and instead is just making an investment like any other.
    • True distressed opportunities never last that long for the foregoing reason since there is always capital available to take advantage. Today – and for the foreseeable future – there is – and will likely be – an almost infinite supply of dollars on the sideline.

      For these reasons, I believe that distressed investing is a red herring and not a viable long-term investment model—at least not anymore. Instead, distressed investing should merely be a tool every savvy investor has in the toolbox.
       
  3. Banks: I think very few banks will fail.  I read someone suggesting several hundred banks would fail.  I don’t see that happening.  Some banks will be stressed and forced to make deals that they aren’t crazy about – and yes, these might be distressed opportunities, somewhat contra my preceding paragraph – but I don’t see many banks dying off.
     
  4. The Future of Office: Gulp – I have been totally WRONG so far in predicting that work-from-home and other headwinds were not as bad as predicted by the market.  Unlike other predictors, I like to take my lumps when I blow it.  I may be proved correct in the end, but if the timing of a prediction is wrong then the prediction is wrong, so I will own my error here.

    Having said that, my prediction is that now – or six months ago – is the time to be trying to find opportunities in the office market.  When the media goes nuts to the negative – calling office a four-letter word – and liquidity and investment interest dwindle to virtually nothing for an extended period -- the simple odds are that this is by far the best place to be Overpaid for Risk.  Now, when it is kind of almost too late, more and more articles are coming out saying this same thing.
     
  5. New York Office: Here, I see the predicates for an office shortage.  Yes, that is what I think is going to happen pretty soon.  Right now, you see top-quality newish offices renting for $200 psf or even more, and that trend of high-end offices being leased up strongly will likely continue as long as the economy is strong.  Yet many businesses cannot afford rents at that level, yet they still need to be in NYC – where their clients are – so what are these businesses to do?  They have not disappeared, and sooner or later – and I think sooner – they will need office space.  Yet right now, more and more office buildings will come off the market due to just being shut down, office-to-residential conversions, and other reasons.  So I sense that those intrepid investors who bought office in the past 36 months will be richly rewarded.  If you are a seller right now, I suspect you will be Overpaid for Risk by holding on, and if you are a buyer, it is probably past time to find bargains, but this is still a better place to look to be Overpaid for Risk than in highly priced industrial, multifamily and even now retail.
     
  6. Tariffs & Elected Officials: People have concerns about tariffs and all sorts of things that – might – affect the real estate markets.  See above about not waiting around for clarity that will never come.  In this vein, I would say that President Trump’s typical plan has been to make an over-the-top statement – i.e., say, 50% tariffs – that scares the other side – and then be delighted to get, say, 10% tariffs merely from the fear caused by the overstatement.  Accordingly, the odds are that most of the calamities being feared will not come to pass.

    Also, even if it turns out that high tariffs or other eventualities are inflationary, see my note above that real estate is supposed to be a hedge against inflation anyway.

    The odds are that none of these macro events will be as important as good underwriting, creating deals, and the like. My suggestion is that real estate players should ignore all of the hyperbole and just do business seeking places to – yes – be Overpaid for Risk.
     
  7. Artificial Intelligence: My sense of AI is that it will change things dramatically but much more slowly than people think.  I like Bill Gates’s quote here that people tend to overestimate the changes that will occur in the next 2 years but underestimate the changes that will occur in the next 10 years.  Overall, I foresee the following taking place in the next year:
    • The big AI change for real estate players will be increased efficiencies, as companies use AI to eliminate employees and make their businesses run more efficiently.
    • You will see more companies trying to use AI as what I have called A Glorified Spell Check to seek out problems and errors in their investments and development decisions.
    • I suspect AI will be helpful in assessing demographic and other changes in markets.

      None of the foregoing will change the real estate world that much.

      But, here is the (sleeper?) BIG issue for AI and real estate, which has been talked about very little.  And that is the effect AI will have on our tenants.  In the end, real estate success or failure is based on who you rent to or who you sell to, and that is many different businesses and persons.  These businesses will find themselves growing (fast, maybe) or dying (fast, maybe) depending on what AI does to them.  I would therefore suggest that real estate players put the anticipated effect of AI on the tenants or prospective tenants of their properties on their due diligence checklist.  I am guessing many are already doing this, but I suspect it will become more mainstream. Interestingly, I don’t think I have seen even a single article about this in the real estate press.  
  8. Power Niches: As the real estate world evolves and information is more and more ubiquitous – plus AI makes it easier for competitors with little expertise to jump into the markets – my Power Niche concept will be one of the few ways a real estate player can achieve long-term outperformance.  Note my book, If You Want to Get Rich, Build a Power Niche.  I also refer to my article, You Will Never Find a Good Deal Again, since nowadays you have to create deals instead of finding them.  This is more potent advice than ever.  If you aren’t creating value, your chances of long-term outperformance are slim.

Before leaving you to 2025’s vicissitudes, I will say something about investments in general.  Perhaps, as a real estate guy, I have no business doing that, but here goes anyway.  I urge people not to get sucked into what is – probably – an animal-spirits-powered bubble.  Cathie Wood says Bitcoin will potentially hit $3.8M, making Bitcoin worth about $78T, almost double the value of all stocks in the US.  Sorry, but that does look a bit excessive….

One way or another, right now, everything is going up like crazy.

Everything is going up like crazy.

Yet real estate is sitting there looking boring.  Next year certainly feels like everything will grow to the moon, but greed can turn to fear in a market with unnerving rapidity.  If we are wrong about missing the upside of an investment, it is a bummer, but if we are wrong about missing the downside, it can be a calamity.

Maybe real estate is where the smart money should be going.

As always, I wish the real estate industry the greatest success.

Bruce Stachenfeld aka The Real Estate Philosopher™