2025 Real Estate Investment Risks: Challenges to Watch and Overcome

Tax increases, inflationary pressures, and tightening environmental regulations represent only the tip of the iceberg. They aren’t just theoretical threats; they’re becoming concrete realities for investors in 2025. Even the most meticulously crafted investment strategies can falter when faced with these growing headwinds.

Approximately 50% of multiple property real estate businesses fail within the first five years, mainly because poor market analysis leaves them unprepared to anticipate and address potential threats.

Navigating the challenges of 2025 will demand a proactive and vigilant approach from real estate investors. The complexities of rising costs, market dynamics, and geopolitical influences underscore the need for preparation today. At Alliance CGC, we believe that foresight transforms risk into opportunity, enabling our investors to thrive in uncertain times.

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Top Ten Issues Affecting Real Estate in 2025

The Counselors of Real Estate and its 1,000 credentialed real estate advisors have identified the key challenges expected to shape the future of real estate across all sectors in 2025. These issues were determined through comprehensive polling, discussion, and debate, offering a forward-looking lens on market trends and risks. From shifting workplace behaviors to evolving environmental regulations, these insights provide real estate professionals with the knowledge to manage an increasingly complex field.

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#1: Global & United States Elections

Elections in over 70 countries throughout 2025, including major economies like the U.S., Taiwan, Mexico, South Africa, and the European Union, are set to influence global policy, economic stability, and real estate markets. These leadership transitions could reshape regulatory frameworks, trade agreements, and taxation policies, directly impacting investment strategies.

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Key highlights investors need to know:

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• ✅ U.S. Policy Shifts: Potential changes to the 1031 exchange, corporate tax rates, and rent control legislation could affect property valuations and cash flow strategies.
• ✅ Global Economic Impact: Election outcomes in key markets may lead to shifts in monetary policy, inflation control measures, and capital flow regulations, influencing financing costs and asset pricing.
• ✅ Trade & Regulation: Cross-border policy changes and diplomatic realignments could reshape global investment patterns, particularly in industrial and logistics sectors.

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What This Means for Investors:

Navigating these shifts requires proactive risk management. Alliance CGC specializes in recession-resilient assets like medical offices, multifamily, and veterinary properties, ensuring consistent returns amid evolving global policies.

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#2: Cost of Financing

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Financing costs remain a significant obstacle for investors as higher interest rates weigh on deal-making and market valuations. With the Federal Reserve’s rate-cutting cycle beginning in September, hopes for rapid reductions have been tempered. Investors are adjusting to the reality that the era of near-zero interest rates — lasting since 2009 — is over, creating challenges for a market long accustomed to cheap capital.

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Key highlights investors need to know:

• Higher costs impact transactions: Financing costs have climbed from sub-4% to over 7%, making it more difficult to assess property values and execute deals. Transaction volume stabilizes but remains subdued, with a 2% year-over-year dip in Q2 2024, buoyed mainly by a single $10 billion acquisition. Without it, volume would have fallen by 13%.
• Lingering uncertainty: While inflation appears to be cooling, and rate cuts from central banks in Canada and Europe provide hope, U.S. investors remain cautious. Slowing rent growth and potential forced sales of distressed assets due to loan maturities add to the uncertainty.
• Buyers and sellers at odds: Sellers are only willing to offload properties in the current high-rate environment if necessary while buyers remain wary of overpaying. This standoff has kept many would-be participants on the sidelines, limiting deal flow.
• Opportunities amid challenges: Some buyers adapt by targeting higher cap rate deals to make acquisitions work. However, broader recovery in deal-making may take another two years as the market awaits greater clarity on rates and rent growth.

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#3: Loan Maturities & Debt Repricing

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According to Trepp, the commercial real estate (CRE) industry faces a looming crisis, with nearly $1.8 trillion in loans set to mature by the end of 2026. To relieve liquidity pressures, lenders have been extending and modifying loans in hopes of better conditions, such as lower interest rates or improved net operating income (NOI). However, this strategy has limits, and the industry risks hitting a wall where refinancing becomes increasingly tricky.

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Key highlights investors need to know:

• Interest rate pressure: Borrowers face significantly higher debt service costs than loans originating in a near-zero interest rate environment. For many, debt payments on refinanced loans could increase by 75% to 100%, making refinancing challenging for those with near-term maturities.
• Impact on property values: Rising debt costs and higher cap rates drive lower property values. This creates additional hurdles for borrowers who may owe more than the current market value of their properties, potentially leading to forced sales or defaults.
• Potential for distress: The competitive landscape shifts if distressed properties are sold at significant discounts. New owners with lower debt costs may reduce rents to attract tenants, potentially pulling business from neighboring properties and fueling further distress.
• Market stability at risk:  A slow resolution of loan maturities could stabilize the market, while a wave of defaults risks widespread disruptions.
• Opportunities for investors: Significant "dry powder" capital is waiting on the sidelines, ready to acquire distressed assets and notes at risk-adjusted pricing. Investors with firm capital reserves could find opportunities as weaker operators and undercapitalized owners are shaken out.

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#4: Geopolitics & Regional Wars

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Geopolitical instability continues to ripple through global markets, affecting supply chains, labor costs, and inflation. These factors influence real estate pricing and risk-adjusted returns, requiring investors to approach 2025 with heightened strategic awareness.

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Key highlights investors need to know:

• Global risk and capital flows: During periods of geopolitical uncertainty, international capital often seeks refuge in U.S. dollar-denominated assets, including U.S. CRE. While this influx of capital can drive demand for real estate, it’s offset by challenges in sectors like office, retail, and industrial, which face headwinds, such as slow office returns, e-commerce growth, and supply chain disruptions.
• Rising risk premiums: Investors should expect higher cap rates and rising risk premiums, with real estate returns adjusting to reflect increased uncertainty.
• Disrupted market patterns: Recent global disruptions, such as the pandemic and geopolitical conflicts, have upended traditional real estate cycles and trends. Investors should avoid broad-based assumptions and instead base strategies on specific property types and geographic market conditions.

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#5: Insurance Costs

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The surge in insurance premiums is squeezing property owners’ margins. Inflation, recalibrated valuations, and escalating claims from natural disasters fuel double- and triple-digit increases.

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Key highlights investors need to know:

• Natural disasters drive costs: The increasing frequency and severity of natural disasters — hurricanes, wildfires, and floods — are major contributors to rising premiums. The gap between insured and uninsured losses signals potential risks for property owners, especially in vulnerable areas.
• Casualty insurance pressures: Rising claims for injuries, particularly in residential and hospitality sectors, and "runaway juries" delivering inflated awards are adding to insurance challenges. States like California exacerbate the issue with legislation heavily favoring plaintiffs in habitability lawsuits, further driving costs.
• Cost-management strategies: Property owners use innovative strategies such as aggregate deductibles, rightsizing coverage, and alternative risk transfer models to mitigate financial impacts. These approaches can reduce costs while maintaining adequate coverage but require careful planning with experienced brokers.
• Shift to alternative solutions: Customized insurance programs, blending self-insurance with risk transfer, are gaining traction. These models provide greater flexibility and cost control, particularly for owners struggling to secure traditional coverage.

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#6: Housing Affordability & Attainability

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Housing affordability remains one of the real estate industry's most persistent and pressing challenges. According to the U.S. Census Bureau, median gross rents increased by 72% between 2000 and 2020, far outpacing the 17% growth in median household incomes during the same period. Meanwhile, these factors, combined with rising labor and material costs, and restrictive zoning laws, continue exacerbating the nation’s affordability crisis.

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Key highlights investors need to know:

• Housing shortage drives costs: The U.S. housing market is still playing catch-up after years of insufficient development. New construction has been concentrated in 15-20 significant metros, leaving other regions underserved and struggling to meet growing demand.
• Cost-burdened renters: As of 2022, 54% of renters are considered cost-burdened, spending more than 30% of their income on rent and utilities. This is a significant increase compared to 48.7% during the Great Recession, indicating mounting pressure on renters at all income levels.
• Future supply challenges: Declining multifamily construction starts to signal reduced supply in the coming years, exacerbating the housing shortage. At the same time, demand is set to rise as the 20-34 age cohort (Gen Z), the demographic most likely to rent, grows over the next several years.
• Preservation and innovation: Addressing housing affordability requires more than new construction. Preserving existing affordable housing, such as naturally occurring affordable housing (NOAH), and implementing innovative zoning and density solutions will close the gap.

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#7: Artificial Intelligence (AI)

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Artificial intelligence (AI) continues to shape the CRE landscape, but its impact depends on high-quality data inputs, addressing issues like granularity and accuracy. While AI introduces efficiencies in operations and decision-making, human oversight remains essential to harness its full potential in this industry.

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Key highlights investors need to know:

• Data quality is critical: AI depends on accurate, granular, and timely data. Algorithms cannot overcome inaccuracies — an issue known as "measurement bias." For example, stock market data aggregates in real-time as decisions are made based on the information immediately available, while real estate data often lags in timeliness due to its dependencies on appreciation, depreciation, and days-on-market.
• Granularity and location: Real estate is inherently location-driven. AI algorithms need help to fully capture the value of specific locations, such as the differences between an office building in Omaha vs. one in New York City. Human intervention is essential to train algorithms to understand these nuances.
• Impact on data centers: AI's vast computing power requirements have driven significant growth in data centers. However, advancements like algorithm serialization could reduce the need for this infrastructure in the future, potentially shifting the investment landscape for data centers.
• Fragmented real estate data: CRE data remains fragmented compared to other industries. Efforts are underway to standardize and regularize data, which could unlock AI’s full potential for driving better decision-making in areas like rent optimization and property valuation.

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#8: Sustainability

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The push for sustainability in real estate has taken on new urgency as extreme weather events and evolving regulatory landscapes drive significant change. While energy efficiency and green building practices have been part of the industry for decades, today's challenges — ranging from billion-dollar climate disasters to stricter environmental standards — demand that property owners and investors adopt a future-ready approach to protect asset values and meet growing accountability demands.

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Key highlights investors need to know:

• Extreme weather risks: The U.S. experienced $28 billion climate disasters in 2023, the highest ever recorded, driven by hurricanes, wildfires, and flooding. Properties that are resistant to such risks face declining value and higher insurance premiums.
• Regulatory pressures: In the U.S., various state and local governments have implemented building performance standards (BPS) to reduce greenhouse gas emissions and enhance building energy efficiency. These standards set specific performance targets that existing buildings must meet by designated deadlines. For instance, New York City's Local Law 97 establishes greenhouse gas emissions caps for the city's most significant buildings starting in 2024, aiming for a 40% reduction in building emissions by 2030 from a 2005 baseline.
• Growing demand for transparency: Investors and tenants increasingly prioritize sustainability, with expectations for transparent reporting on energy efficiency and carbon footprints. This shift toward environmental, social, and governance (ESG) compliance impacts financing, leasing, and long-term property valuation.
• The business case for resiliency: Investing in energy-efficient upgrades, decarbonization, and AI-driven sustainability solutions is no longer optional. These steps help mitigate financial risks tied to weather events, regulatory changes, and investor demands while positioning buildings as competitive and future-proof.

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#9: Office Vacancies, Tax Base, and the Health of Urban Cores

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Persistent office vacancies continue to challenge urban economies, reshaping city tax bases and investor strategies. The U.S. office market has faced unprecedented shifts, driven by remote and hybrid work. According to NAIOP, negative net absorption totaled 13.4 million square feet in early 2024, with a projected 4.5 million more by 2025.

This trend suggests that office rents will likely decline as companies embrace flexible work arrangements, reducing their need for traditional office space. The increased availability of vacant office space intensifies competition among landlords, compelling them to lower rents to attract tenants.

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Key highlights investors need to know:

• Urban impact: Office vacancies weaken tax revenues in major cities like New York and San Francisco, where reduced property values — down as much as 50% sometimes — undermine city budgets and public services.
• Financing struggles: Diminished net operating income (NOI) and declining valuations have made securing capital for office renovations challenging. High interest rates and equity requirements further exacerbate the problem.
• Opportunities in repurposing: Transforming empty offices into housing, healthcare, or industrial spaces is a growing trend, but it requires significant investment and time. Investors can focus on cities innovating with mixed-use redevelopment strategies.

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#10: Price Expectations Gap

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The price expectations gap remains a pressing challenge for real estate investors, as buyers and sellers need help aligning on asset pricing. While steep price declines across sectors have slowed since 2023, the divide persists, fueled by higher interest rates and cautious market sentiment. This misalignment affects transaction volumes and creates uncertainty for investors.

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Key highlights investors need to know:

• Sector-specific impact: Central business district (CBD) office assets have declined significantly, with prices down 29.4% year over year as of Q2 2024. However, not all sectors are equally affected. Industrial real estate, for example, has remained resilient, posting an 8.6% one-year price increase as of Q2 2024. This resilience highlights the importance of sector-specific insights for investors.
• Potential game changers: Loan maturities push sellers to adjust prices, creating opportunities for well-prepared buyers. Stabilizing or declining interest rates could also narrow the pricing gap.
• Timing is critical: Buyers waiting for distress sales may find opportunities as refinancing pressures mount, but careful market analysis is key to avoiding overpaying or catching declining assets.

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The Right Partner Can Manage 2025’s Real Estate Risks

Real estate investment in 2025 presents both complex challenges and high-potential opportunities. Navigating this evolving market demands experience, insight, and a focus on strategic asset selection. With over 30 years of expertise and billions in transactions, Alliance CGC specializes in recession-resilient asset classes — including industrial real estate, medical offices, multifamily properties, retail, and veterinary — delivering consistent cash flow and reliable returns, even during market volatility.

Alliance focuses on acquiring income-producing assets and maximizing tax advantages through strategies like depreciation, helping investors minimize liabilities while maintaining strong returns. Our data-driven approach and hands-on management ensure every investment is positioned for long-term success.

Whether seeking steady rental income, strategic insights from industry veterans, or recession-resistant investment opportunities, Alliance CGC turns today’s risks into tomorrow’s gains.

Invest with Alliance and secure your financial future with confidence!

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