Amid a more favourable macroeconomic backdrop, and the potential pivot to rate cuts, the balance of risk will shift in favour of deploying capital. A new growth cycle has already elevated transaction activity in 2024 above 2023's lows, with further improvement expected into 2025 and beyond.

Key sector trends to watch in 2025 include rising optimism for prime office assets and an increase in transactional activity among institutional players with renewed or increased allocation targets. Additionally, the growing interest in data centres is expected to drive significant capital raising efforts, alongside a resurgence in land banking as a strategy to unlock future growth opportunities.

The drive will be on unlocking value, so we expect greater competition in particular subsectors of the market, with greater resilience in ‘beds’ (residential and select hospitality), ‘sheds’ (industrial), ‘tech’ (data centres), retail and centrally located prime offices.

Key sector trends to watch in 2025

Data Centre FOMO fuelled by AI. AI growth is set to accelerate through 2025, intensifying demand for power and grid infrastructure. This shift will put the spotlight on how the market navigates land and power constraints amid surging data centre demand. The rapid expansion of data centres will also prompt more investors to raise capital or seek out new equity sources for these investments.

Industrial vs Data Centre. Expect increased investment in the data centre pipeline including sites, with competition against traditional industrial users set to rise. This demand will heighten pressure on renewable energy goals due to their substantial power requirements, and present significant opportunity for growth.

Super-sized funds to reshape capital markets. We will see increased appetite for risk among superannuation and pension fund investors as they become active players in land acquisitions for data centre, last mile industrial, land lease communities and even well-located Prime CBD offices. Some funds are positioning to capitalise on the anticipated growth cycle in core CBD markets, which are experiencing low supply and accelerating tenant demand.

Playing the Long Game with Land. 2025 will see an increased growing focus on land acquisitions to position longer-play development pipelines across sectors such as industrial (logistics, last mile and data centres), residential (including multifamily, student, land lease communities), childcare, and life sciences.

Liquidity Boost. An increase in motivated sellers and capital recycling is expected to boost market liquidity, enabling redeployment opportunities for investors with renewed or increased allocation targets.

Institutional Allocations. Institutional investors are tipped to adjust sector allocation targets. Buoyed by demographic and technology tailwinds, Savills expects higher allocation to industrial, residential, select retail and hospitality, alongside niche subsectors such as data centres, cold storage, and student housing.

Supply Squeeze to Drive Rental Growth. Rising development costs have prompted more investors to shift strategies, creating a supply squeeze and constraints in certain locations for industrial, residential, retail and prime offices. Savills predicts this will trigger new rental growth cycles and attract investors.

Investors to Target Premium Office. Demand for premium central office spaces will continue to intensify by tenants’ "flight to quality," reducing premium vacancies and driving rental growth, with investors set to target and scale prime office assets in 2025.

Industrial Still a Firm Favourite. A strategic recalibration is underway as investors deploy capital to develop or reposition properties in high-demand, growth-oriented markets, aiming to expand sector exposure and enhance returns.

Risk-Return Reset. Investors will be recalibrating risk-return expectations, a strategic move with a heightened focus on deploying capital to drive returns through targeted income growth strategies, with greater resilience in ‘beds’ (residential and select hospitality), ‘sheds’ (industrial), ‘tech’ (data centres), retail and centrally located prime offices.

Decreasing Interest Rates & Pricing Stability. The expected pivot in central bank policy domestically will help to stabilise prices, yet some pressures will remain. The market will remain competitive for select asset classes and unlock new opportunities for value-add and opportunistic investors.

Disclaimers:

The postings by any individual on any blog do not necessarily represent the position of Savills, its strategies or opinions.