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2025 Mid-Year Outlook

6/25/2025

by Kevin White, Head of Real Estate Research - Americas

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2025 Mid-Year Outlook

U.S. real estate started 2025 on a solid footing, but more recently, federal policy has cast doubt over the durability of the recovery, in our view. For now, we believe that the policy mix will include higher tariffs (albeit less draconian ones than un-der earlier proposals), reduced immigration, and a broadly static federal deficit (i.e., net-neutral tax and spending cuts). The long-term implications of this program for social welfare and national security are subject to debate. Taking a narrower view, we believe that over the next year, it will slow the economy, albeit not to the point of .

In general, a weaker economy undermines critical demand drivers (e.g., job creation and consumer spending).[1] Yet in our view, any slowdown would collide with independent trends pushing in the opposite direction, including prohibitive home-ownership costs (Residential), a return to the workplace (Office), e-commerce expansion (Industrial), and a proliferation of consumer services such as healthcare (Retail). Furthermore, any demand pullback should be offset, in our view, by an evap-orating supply pipeline (, weighted across sectors, have slid 59% (trailing four quarters) from their 2022 peak).[2]

From a longer-term perspective, we believe that tariffs improve the outlook for real estate. Over time, real estate values his-torically gravitated toward the cost of replacing the assets: higher prices had stimulated development that puts downward pressure on rents and prices, while lower prices curtail it (see Exhibit).[3] Following a 20% correction over the past two years, we estimate that on average, real estate values sit at about a 15% discount to (with large variations across sectors and markets).[4] We believe tariff-induced cost increases for key construction materials (e.g., steel, lumber, and ce-ment), finished products, and equipment could expand that discount further, ultimately driving higher rents and prices via a prolonged supply shutdown.

EXHIBIT: Real Estate Prices and Construction Costs

Sources: Engineering News-Record (construction costs); NCREIF (prices); DWS calculations. As of March 2025.

Policy uncertainty has clouded the near-term outlook, but for now, we believe that the consequences will be relatively be-nign, tempering the recovery without triggering a double dip. Moreover, in our view, any setback will be more than offset by stronger, rent-driven appreciation in the aftermath.