United States economic outlook

Activity
The US economy is starting 2025 in seemingly good shape, with the economy growing robustly and a very solid-looking labour market. Policy changes under the Trump administration will shape the outlook from here. A combination of expected tax cuts, higher defence spending and looser regulatory policy will drive a modest acceleration in growth this year and into 2026. This should offset the drag from rising tariffs and slower net migration. However, uncertainty around this policy mix is high. An agenda that leans more on tariffs and large-scale deportations would hurt activity, while one that minimises these disruptions would be more growth-friendly.

Inflation
A welcome slowing in core inflation in December points to ongoing moderation in price pressures, even if this remains bumpy and uneven. However, there are threats to this trend in 2025. Firstly, price resets early in the year could drive a re-acceleration in sequential inflation over the first quarter of 2025. More fundamentally, a combination of demand-side stimulus (in the form of looser fiscal policy) and shocks to the supply side (via tariff hikes and deportations) are expected to leave inflation stuck above target.

Policy
The Federal Reserve (Fed) delivered a 25 basis-point (bp) rate cut in December. But it signalled a slower pace of easing ahead as it eyes renewed inflation risks from Trump’s policy agenda. Against this backdrop, and with the labour market looking solid, we expect the central bank to stay on hold until its June meeting and deliver just two 25bp cuts this year. This is still more easing than currently priced in by the market (40bps). Policy fireworks early in Trump’s second term or firmer-than-anticipated inflation pressures could see the central bank deliver even fewer cuts.

Source: abrdn, January 2025
Forecasts are a guide only and actual outcomes could be significantly different.

North American real estate market overview 

We face a higher-for-longer scenario as the Trump administration gets underway and there is limited room for yield compression. Instead, returns will be driven by net-operating income (NOI) growth.

In this higher-for-longer environment, we are also expecting $500 billion of commercial real estate loan maturities, of which multifamily and offices make up a significant part. This could open more attractive entry opportunities in these two sectors, but investors should remain selective at a market and asset level. 

In general, we are most positive about the multifamily sector, as excess supply should be absorbed by mid-2025. Industrials should peak at a relatively low vacancy rate, but a reacceleration of rents will probably come only in 2026. Meanwhile, office performance will be highly dependent on market and asset quality.

North American real estate market trends

Offices 

Year-on-year job growth for office users remains around the 1% mark. For the next 18-24 months it appears there is little likelihood of a dramatic change in conditions. 

Settling property values should also put pressure on asking rates, as more buildings are transacted at significant discounts to previous valuations. New owners can charge lower rents and still generate acceptable returns, with low occupancy rates.

However, one bright spot is that we seem to be at the start of a long process of rationalising office space and we expect more demolitions to come during 2025.

At the market level, the performance bifurcation will be apparent, with the supply constrained East Coast outperforming the technology-led West Coast. But at an asset level, we expect the preference for well-amenitised, new-build offices to drive performance in these markets.

Industrial and logistics 

Industrial and logistics are starting 2025 under significant supply pressure, which we only expect to alleviate in the third quarter. The uncertainty at the end of 2024 surrounding the International Longshoremen’s Association (ILA) negotiations and a looming Trump administration gave occupiers plenty of excuses to delay expansion.

With the possibility of ILA strikes behind us, the long-term drivers surrounding the upper Midwest, the East Coast and the Gulf Coast remain strong with nearshoring and reshoring. But we expect more intense distancing from Chinese imports, which will put pressure on West-Coast industrials.

Industrial vacancy rates could peak at a relatively low rate in 2025, which could support a re-acceleration in rental growth once availability begins to tighten again in early-2026. But we don’t expect rental growth to return to pre-Covid levels.  

Retail

Despite a wave of recent store closures hitting the market, we expect strip retail and lifestyle centres to perform well. Availability remains tight and spaces are likely to be filled quickly.

However, we expect a significant variation in rental performance in the year ahead. Fast-growing cities in the Southern and South-Western regions of the US, and smaller spaces along primary corridors, are outperforming because of population growth in those markets.

Meanwhile, the availability of malls should keep rising for the foreseeable future and asset quality will be a great differentiator in mall performance.

While it does look positive in the short term, a weakening consumer backdrop and shallower tenant demand in the later years of the forecast may eventually challenge rental growth.

Multifamily

Average mortgage payments were 35% higher than average rents, as at the third quarter of 2024. Many US households are likely to rent rather than buy a home, which preserves renter demand.

By mid-2025, multifamily construction starts are expected to be 74% below their 2021 peak and 30% below their pre-pandemic average. Demand for East-Coast hubs is expected to remain strong. With high barriers to homeownership and limited supply numbers, vacancy rates for the East-Coast markets should stay relatively tight.

Meanwhile, Los Angeles apartments should experience growth in NOI, given occupancy improvements following the fires. 

Overall, this translates into a relatively modest outlook until mid-2025. But there is the possibility of a delayed supply response, given the current higher-for-longer environment. The average construction lead time for multifamily could mean that rental growth accelerates as we head into 2026.

Outlook for risk and performance 

US office fundamentals remain challenging, given low job growth in the office sector. Impending lease turnover risks may also lead to even higher vacancy rates. Returns will be highly market- and asset-specific. However, we expect office demolitions to accelerate this year, which could mark the beginning of a long road of rationalising supply with demand.  

Multifamily assets in Los Angeles will perform well, as the impact of the fires will drive occupancy and NOI growth. But the supply constrained East-Coast market is also among our top picks. The vacancy rate for multifamily should stabilise in 2025, but a delayed supply response should re-accelerate rental growth and capital values in 2026.

The lack of new supply in the retail sector continues. We particularly like grocery or discount-store-anchored assets in the Sunbelt and select states in the Northeast, such as New Jersey and Massachusetts. These should benefit from higher population growth, greater buying power, and a limited supply pipeline. Rental growth for retail is likely to moderate as retail sales stabilise and as the pool of tenants seeking space becomes shallower.

Performance in the industrial and logistics markets should be strongest around the Gulf and East-Coast ports. We think these ports should be primed to capture more shipping volumes from friendshoring, as the US looks to further decouple from China. More inland markets with established intermodal terminals, such as Chicago and Dallas, should benefit from the ongoing nearshoring and reshoring efforts.