In 2025, the real estate market for private capital will evolve considerably, driven by economic shifts, regulatory pressures, and advancements in technology. As a maturing debt landscape, rising demand for sustainable assets, and emerging technologies such as AI and blockchain reshape the industry, market participants are likely to adopt alternative strategies to navigate the associated challenges and opportunities. This evolution aligns with renewed optimism among investors, leading to a resurgence in dealmaking after two years of reduced spending. Cyclical factors are beginning to reverse, with central banks across major economies starting to lower interest rates, and fears of a global, or localised, recession subsiding. Additionally, political stability in major economies, including the UK, is anticipated to improve following a series of elections in 2024. This forecast highlights the primary trends we expect to shape the sector in the coming year.

Key Considerations in 2025

Refinancing Challenges and the Rise of Alternative Financing Solutions

With a significant volume of debt maturities approaching, refinancing is anticipated to encounter challenges due to higher interest rates and stricter lending standards. In response, private credit, bridge financing, and preferred equity are expected to become more prominent, offering greater flexibility than traditional bank loans to meet financing needs.

Back Leverage Remains Attractive in Evolving Formats

Back leverage is to remain a popular strategy within private equity real estate, adapting to the current interest rate environment and growing demand for higher yields. By applying leverage at the fund level rather than at the asset level, institutional investors can achieve target returns while minimising debt exposure on individual assets—an advantageous approach given fluctuating debt markets.

Renewed Interest in Offices and Retail Beyond Trophy Assets

A resurgence in office and retail sectors is expected in 2025, extending beyond ’trophy‘ assets. With hybrid working and evolving consumer expectations, there is renewed demand for flexible office layouts, a focus on employee well-being and community-centric retail spaces. Adaptive uses in these sectors align with tenant needs, making non-prime assets increasingly attractive.

Sustainability Driving Asset Repurposing

Sustainability remains a critical theme, influencing substantial capital expenditure toward repurposing outdated office buildings. Investors are focusing on transforming energy-inefficient properties into sustainable offices or life science facilities, aligning with ESG standards and tenant preferences for greener spaces. Certifications like LEED and WELL continue to be important for maintaining long-term asset value.

AI Transforming Property Demand and Asset Management

The impact of AI on real estate is forecast to expand in 2025, driving demand for data centres, particularly smaller colocation, and edge facilities in emerging regions. AI applications are streamlining asset management through data-driven tools that support valuation simulations, tenant performance analysis, and predictive maintenance, optimising decision-making across portfolios. AI adoption in commercial real estate is still in its infancy but real estate organisations will increasingly become more open to AI spending in 2025.

Trends and themes to act on

• Exploring Alternative Financing Solutions: As refinancing challenges intensify, assess opportunities in private credit, bridge financing, and preferred equity to enhance financial flexibility and optimise capital structure. Explore back leverage as a strategy to increase returns.
• Leverage Evolving Asset Trends:Capitalise on the renewed interest in offices and retail spaces. Consider investing in repurposing outdated properties to meet ESG standards. Position yourself to take advantage of the growing demand for data centres.
• Embrace AI Technologies:Integrate AI-driven tools to enhance asset management, optimise valuations, and simulate tenant performance. Stay ahead of the curve by allocating resources to AI adoption and training your team on leveraging these technologies effectively.