Implications for real estate
What do these drivers mean for real estate? First, if we accept that economic and geopolitical uncertainty will likely remain unusually high for the foreseeable future, we must recognize that we can’t just wait this out. Real estate actors need to adapt their decision-making in this dynamic and unpredictable environment as lease events will continue to occur, portfolios and space will need to be refreshed to meet changing enterprise needs, and capital will need to be deployed.
We have already seen the impacts of this volatility over the past quarter, with some businesses pausing decisions, slowing down investments, or cancelling plans as they contend with evolving costs and supply chain challenges. But this focus on short-term reactions is not the whole picture. Major logistics and distribution companies are continuing to sign large deals in several markets as their clients lean on them for supply chain support. For example, in the second quarter Panattoni leased 885,000 square feet to GXO Logistics in the UK; LXP Industrial leased 1.1 million square feet to a global logistics provider in Greenville, South Carolina; and BroadRange Logistics preleased 309,000 square feet in Atlanta. Manufacturing requirements are also rising in some locations. Furthermore, many sectors have limited exposure to the current trade and tariff challenges and benefit from other trends. Rising defense spending presents opportunities for expansion in Europe, and in Germany in particular. Living markets are benefiting from an expanding asset base, high investor demand and the demands of a growing and aging urban population. And the supply of data centers can’t keep pace with demand.
Second, a less predictable growth and inflation environment means a greater focus on cost optimization. According to our occupier Pulse Survey, 40% of respondents in the U.S. have taken measures to shore up their business position, from reducing hiring to adjusting supply chains and pausing transactions. For APAC and EMEA, the figures are 54% and 57% of respondents respectively. But while some office occupiers are opting to delay space requirements, this is far from universal. We expect global leasing volumes over 2025 to be higher than last year, with robust demand in many CBD markets. For example, KPMG concluded a deal in Frankfurt during H1 to relocate from the airport to the heart of the city, in a megadeal that secured 33,000 square meters of prime office space.
Third, it means an increased desire for flexibility and adaptability. Businesses are looking to be more agile and to de-risk longer-term space and capex decisions. The use of Flex space in the office market, while still small, is on the rise, with growing demand for managed space solutions as well as more interest in flexible leasing solutions across the office and industrial sectors. Companies are, sensibly, paying to keep their future options open. For the industrial market, flexibility is key for organizations more exposed to short-term disruption. To deal with the uncertainty around tariffs, shipments, and supply chains, some companies have been looking for short-term overspill space (such as that provided by 3PLs), some have rerouted shipments to free trade zones or bonded warehouses, and others have taken short-term lease extensions.
From a position of resilience
The real estate sector is well positioned for the challenges this year presents. Property values have adjusted considerably over the last few years, meaning that further valuation risk is low: real estate is well priced and the risk of additional declines is modest in most major markets. Supply-side risk is also limited. At the start of previous periods of heightened uncertainty, the construction pipeline was large. This time the pipeline is declining, at least in North America and EMEA, meaning very little risk of oversupply or excess new space hitting the market, lying empty and pushing down rents. While this lack of supply is a positive for investors, it creates a risk for tenants, who need to get ahead of the market in portfolio and lease planning given the lack of suitable upcoming space. In APAC, a larger pipeline is being matched by demand for new space in many markets. On the demand side more broadly, risk is neither acute nor concentrated, with most real estate sectors having limited direct risk exposure to trade disruption beyond the indirect economic effects. Some sectors, like Living, should be largely immune, and others which are more impacted, such as logistics, will also see upside and opportunity. Lastly, as debt costs continue to trend downward, this will provide another pillar of support to the real estate sector.
Revisiting this year’s predictions
In January, we called out five predictions for the year. We think these remain broadly valid, though more nuanced in terms of how they will play out.
