How Geopolitics Will Shape CRE Investment in 2025

The final quarter of 2024 was not without its excitement. We saw significant government fiscal policy announcements in the United Kingdom and France; an unscheduled election in Japan; the announcement of an unscheduled election next February in Germany; and an unprecedented large Chinese monetary and fiscal policy stimulus. And that’s before we even get to the financial-market-moving U.S. election results.

The big question for real estate investors is: To what degree will these geopolitical events impact plans for investing in 2025?

Let’s look first at the nominal economy—inflation and interest rates. Regular readers will know that I have been in the “higher for longer” camp on interest rates and inflation for a few years now. This reflects my view that six secular trends will drive the New Normal and all are inflationary rather than deflationary:

• Deglobalization raises the friction costs of trade.
• Weak demographics raise the cost of labor, especially if immigration is curbed.
• The upfront cost of investment in artificial intelligence is inflationary, even if AI is ultimately deflationary.
• Likewise, the upfront cost of the net zero carbon transition is near-term inflationary.
• Increased climate volatility raises the cost of food and energy.
• And all this is happening at a time when governments are carrying high debt loads relative to GDP and bond markets are more discriminating about sovereign risk.

Based on recent policy announcements, I expect an increase in inflationary pressures in the U.S. economy, as labor becomes scarcer at the margin and higher tariffs increase production costs. An example of the potential impacts can be found in construction, where the U.S. is heavily dependent on lumber from Canada and both illegal and legal migration for labor. The upward pressure from inflation is only somewhat mitigated by the expectation that energy prices will fall as domestic production increases. Unsurprisingly, markets are pricing a basically flat U.S. yield curve at approximately 4.25 percent. We feel it is prudent for U.S. real estate investors to use that figure in their underwriting.

But what about the real economy? How has the outlook for economic growth and employment changed? Our expectation is that over the next few years, tax cuts and deregulation should help boost growth and, therefore, we revised up our GDP growth forecasts. When we get to the outer years of the five-year forecast, however, we expect the negative impact of higher inflation and interest rates to start to bite. One of the key constraints on growth in that period will be a shortage of labor as immigration restrictions start to impact potential employment growth. If those policies are softer than currently messaged, we may see an upward revision to the forecasts.

We are forecasting the negative impact of increased trade frictions on other major global markets, particularly those that have export-driven growth. When put in a global context, the U.S. still has the best outlook for growth in the G7, even with an elevated outlook for interest rates and inflation. From a global real estate perspective, we remain optimistic about U.S. returns and that global capital will likely continue to be attracted to U.S. real estate as we head into the next cycle.

Sabina Reeves is chief economist & head of insights and intelligence at CBRE Investment Management, associate fellow at the University of Oxford and council member of Marlborough College. Follow Reeves on Threads: @sabinareevesconomist or on Linkedin.

Read the January 2025 issue of CPE.