At the halfway mark for 2025, the U.S. commercial real estate market stands at a precarious intersection: hope for recovery meets the grinding reality of restrained capital markets and challenging access to funding. Vivid optimism that briefly illuminated the start of the year has been tempered by rising borrowing costs, evolving debt structures and an investor landscape still wary from recent economic and geopolitical shocks, according to a midyear survey of the industry by Cozen O’Connor.
The State of Capital Markets
Equity markets kicked off 2025 with promising signs. Fundraising activity in the first quarter exceeded $57 billion, marking a year-over-year increase that suggested renewed confidence among real estate investors. This flurry of early investment, however, quickly encountered headwinds. Volatility in equity markets surged amid new U.S. tariff policies and global trade anxieties, causing both valuations and investor enthusiasm to waver.
Transaction activity, though improved from the stagnation of prior years, began to stall as uncertainty gripped the financial system. Transaction volume for single-asset commercial property fell by 8% year-over-year, with dollar volume transacted also down 12%. While these were marginally higher in the first quarter compared to late 2024, the numbers suggest a market bottoming out, rather than a rebound.
Institutional capital, once dominant, has become exceedingly selective, with many major real estate investment trusts turning into net sellers under redemption pressures. This has softened competition for deals and, for some, created rare opportunities to secure value through negotiation, respondents told Cozen O’Connor.
Access to Debt: Tight and Cautious
The debt markets, which provide much of the lifeblood for real estate development, continue to pose significant challenges. Although the Federal Reserve paused its cycle of rate hikes earlier this year, borrowing costs remain elevated compared to pre-2022 levels. The tighter credit environment means that both banks and alternative lenders have grown more restrictive, scrutinizing borrower profiles, underlying property cash flows and loan-to-value ratios more intensely. An overwhelming sentiment among commercial real estate professionals—over 95% believe debt availability is constrained across banks, debt funds and investment firms, the survey found.
Banks continue to grapple with risks in their commercial real estate portfolios, prompting them to limit new lending and favor conservative leverage, typically with loan-to-cost ratios of 60–65%. High-leverage transactions are becoming increasingly rare, with even syndicators and merchant developers facing new hurdles in obtaining funding.
Non-bank and private debt funds, meanwhile, have stepped in to fill some of the gap left by traditional lenders; however, they too are tightening their terms and demanding higher spreads to offset uncertainty and risk.
With $4.8 trillion in commercial mortgages outstanding and roughly 20% maturing this year alone, demand for refinancing is intense. Yet lenders are highly selective, and well-capitalized investors with robust business plans and balance sheets have the best chance of success in this climate.
Investor Strategies and Opportunities
This disciplined, risk-averse capital market environment has pushed many would-be buyers to the sidelines. Yet for those with the resources and conviction to act, conditions offer opportunities: reduced buyer competition, greater access to off-market deals, and the chance to acquire assets at more attractive pricing. Private equity and institutional funds are showing renewed interest in niche property sectors and prime locations, banking on long-term value in a market where values have already reset and stabilized in key segments.
Investors remain vigilant, watching for signals from the Federal Reserve and monitoring the evolving regulatory and policy environment. If borrowing costs ease further and capital market stability continues, many anticipate an uptick in both deal-making and transaction volumes in late 2025 and beyond.
As summer unfolds, capital remains both the ultimate catalyst and constraint in U.S. commercial real estate. Fundraising and transaction activity fluctuate with every policy announcement, rate move, or global economic shift. For now, the market is one of disciplined caution: deals are struck only after rigorous risk assessment, and capital is deployed only when value and fundamentals align.
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