A look back. The potential drivers of commercial real estate returns in 2025. And a look forward.
Key takeaways
- The dispersion of REIT sub-sector returns makes a case for active management.
- For REITs, the composition of interest rate changes matters as much as the level.
- Investors should consider building CRE exposure before distress peaks.
A look back. The potential drivers of commercial real estate returns in 2025. And a look forward.
This month we are providing our outlook for the year ahead.
Let’s first start with a quick recap of listed versus private returns in 2024.
1. Listed and private real estate returns in 2024
Listed REITs rose 4.9% percent last year, which follows 11% returns in 2023.
While this may seem modest at first glance, returns were as high as 15% in mid-September.
More importantly, this represents a remarkable, though not entirely unexpected, turnaround from when listed REITs bottomed in late October 2023.
The sector now stands more than 31% percent above that trough. It experienced two significant rallies over that period.
The first was 26% from October 2023 to December 2023 and the second was 28% from April 2024 to September 2024.
What’s also notable about this year’s performance is the pronounced dispersion between the best performing subsector, which was specialty at almost 36%, and the worst performing subsector, which was industrial, at almost negative 18%.
While the market often considers listed REITs a singular asset class, it’s actually a collection of 18 different subsectors that can behave differently at different times. 2024 was no exception.
In total, ten out of eighteen subsectors were positive with six out of those subsectors generating returns of 20% or greater.
EXHIBIT 1
2024 REIT subsector performance

At December 31, 2024. Source: NAREIT
By comparison, private real estate, as measured by the NCREIF ODCE index, which tracks 25 open-ended funds that own core commercial real estate, was down negative 3.2% through the first three quarters of 2024.
It’s worth noting that listed REITs stood at positive 14% year-to-date as of the end of the third quarter.
The fact that listed is rising while private is declining shouldn’t come as much as a surprise.
We’ve long argued that listed REITs are leading indicators for private in both downturns and recoveries.
In fact, listed REITs have outperformed private real estate by more than fifty-two percentage points over the prior eight quarters, as shown in this chart.
EXHIBIT 2
Cumulative performance difference of listed versus private real estate

As of September 30, 2024. Source: NCREIF, NAREIT, Cohen & Steers
What may surprise people about private CRE valuations is what property types performed the best.
Open-air shopping centers led with unlevered property price returns of 3.4% followed by industrial at 1.1%, apartments at 0.5% and office that’s down nearly 10%.
We think this is an early signal that last cycle’s winners may not be next cycle’s winners.
Now that we’ve reviewed what happened, let’s consider the potential drivers of commercial real estate returns in the year ahead.
2. Drivers of returns in 2025
We think investors have become conditioned over the past several years to believe that rising interest rates are uniformly negative for listed REITs.
That’s not true. The composition of rate moves matters.
The most challenging regime is when real rates are rising and inflation breakevens are falling.
This is also known as stagflation, which is what persisted throughout 2022 and most of 2023 as the Fed increased interest rates to bring down inflation. Listed REITs struggled in that environment. The good news is that stagflation is rare historically.
EXHIBIT 3
Real estate performance during interest rate and inflation regimes

As of September 30, 2024. Source: Cohen & Steers
However, an environment in which real rates rise and inflation is elevated is a supportive backdrop for listed REITs.
This is because in those conditions net operating income growth typically accelerates, and lending conditions loosen, which can mitigate the impact of rising financing costs.
Bottom line, we think commercial real estate, including listed REITs, can produce positive returns in the year ahead if interest rates rise as long as NOI growth accelerates and lending conditions loosen.
It’s possible that listed REITs are more volatile than private over the near term, but they have much higher correlations over the medium term given similar fundamentals. And, hopefully it goes without saying, REITs have done well in a falling interest rate environment, especially when inflation is falling as well.
This brings me to my last point. What’s our outlook for listed and private returns in the year ahead?
3. The 2025 real estate outlook
We think total returns for private CRE have already troughed. While unlevered prices are still declining, income returns are now offsetting them. However, we do not expect a V-shaped recovery for two primary reasons: First, global central banks aren’t coming to the rescue like they did post the great financial crisis.
Second, we expect an uneven recovery across property types.
We think the recovery may mirror what occurred in the early 1990s, albeit for different reasons. This likely means that total returns net of fees for core will be in the low single digits.
That said, we believe new capital can be selectively deployed at superior returns than headlines suggest via property type and geographic selection.
By comparison, we forecast listed REIT total returns in the high single digits at the index level, driven by earnings and dividend yield.
This would be just below the average annual returns we’ve seen over the last three decades, which you can see in this chart.
EXHIBIT 4
Annual and average real estate returns (25 years)

As of December 31, 2024. Source: NAREIT, Cohen & Steers
This is an attractive market for active management, however.
Active managers may be able to increase returns into the low double digits, in our view. We see potential to increase returns even further should investors take advantage of periodic pull backs, such as what we saw in December of last year, to invest given economic and geopolitical uncertainty.
We underscore that institutional investors may be able to build better core portfolios by adding a 10% to 30% allocation of listed REITs to an existing private CRE portfolio.
This can potentially increase returns, reduce volatility, and expand exposure to alternative property types that are underrepresented in most core portfolios.
Finally, one question we’re being asked related to our outlook is whether it’s too early to build exposure to CRE given distress is rising in the CRE debt markets.
Our answer is no, even as we acknowledge that distress is likely to rise over the next year and the headlines will get worse before they get better.
This is because distress in the debt markets is a lagging indicator.
We describe distress in the debt markets as the final stage of the grieving process. Acceptance.
Lenders don’t like liquidating distressed loans into a distressed market because there’s limited transparency on prices.
However, they feel far more comfortable liquidating distressed properties into a stabilized market. That’s where we think we are headed in 2025.
Watch December 2024 The Real Estate Reel: How institutions are invested in real estate headed into 2025
Watch all The Real Estate Reel videos.
FURTHER READING

Why active management matters for listed real estate
Active managers of listed real estate funds have historically outperformed passive. We believe this is due to the inefficiency, diversity and complexity of listed real estate markets.

Cohen & Steers – 40 years, one obsession: Performance
For nearly 40 years, Cohen & Steers has been delivering results built on the bedrock of our philosophy, our passion, our obsession: performance.

3 Reasons to own Listed REITs today
We see compelling evidence to own listed real estate in the current environment.
Data quoted represents past performance, which is no guarantee of future results. The information presented does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected. There is no guarantee that any market forecast set forth in this video will be realized. There is no guarantee that any historical trend referenced herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The mention of specific securities is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice. There is no guarantee that an actively managed investment strategy will outperform the broader market index.
This video is for informational purposes and reflects prevailing conditions and our judgment as of January 2025, which are subject to change. This material should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or take into account the specific objectives or circumstances of any investor. We consider the information in this video to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment. Please consult with your investment, tax or legal professional regarding your individual circumstances prior to investing.
Risks of Investing in Real Estate Securities. Risks of investing in real estate securities are similar to those associated with direct investments in real estate, including falling property values due to increasing vacancies or declining rents resulting from economic, legal, political or technological developments, lack of liquidity, limited diversification and sensitivity to certain economic factors such as interest rate changes and market recessions. Foreign securities involve special risks, including currency fluctuations, lower liquidity, political and economic uncertainties, and differences in accounting standards. Some international securities may represent small- and medium-sized companies, which may be more susceptible to price volatility and less liquidity than larger companies. No representation or warranty is made as to the efficacy of any particular strategy or fund or the actual returns that may be achieved.
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