The Evolution of CRE Demand

Commercial real estate has, somewhat quietly, undergone a structural transformation. Although the shift has been gradual, the cumulative impacts of this transformation have become more apparent and stand to have a profound effect on the performance of CRE fundamentals and consequently the investment landscape. Demand for space has become relatively more important over time as the composition of demand itself has shifted.

These changes have created a market that is less cyclical in aggregate, but more dispersed and selective at the market/submarket and asset level. Understanding this shift is essential for investors and developers navigating the next phase of the CRE cycle.

Supply growth has slowed considerably over the last roughly 45 years. Although we’ve seen periods of acceleration and deceleration that coincide with the business cycle, and some property types have gone in and out of favor for development, the overall trend is clearly a slowdown. Why? First, simply the law of large numbers. As inventory has grown larger over time, the denominator effect lowers the rate of growth. Moreover, we already have most of the inventory we need to run the economy, and any growth is incremental.

Second, capital discipline and higher rates of return have led to somewhat greater risk aversion to development. Third, regulatory friction such as zoning constraints, community opposition and extended and onerous permitting and entitlement processes have raised costs, extended timelines and created more instability. Finally, construction risk itself has become elevated—labor availability, materials pricing and supply-chain uncertainty have increased development risk premiums.

Relative to eras past, demand for space is taking on greater importance in determining market outcomes.

Taken together, these forces have reduced the role that supply growth plays in impacting space market fundamentals, especially the key equilibrium variables of rent and vacancy rate. Consequently, this means that relative to eras past, demand for space is taking on greater importance in determining market outcomes.

But hasn’t demand growth also slowed as the economy has grown? Yes, but relative to the slowdown in supply expansion, demand growth has been more modest. Those mild shifts in demand now translate into larger movements in occupancy, rent and property values than they would have in prior cycles, even when controlling for the stage of the business cycle.

Simultaneously, the composition of CRE demand has been changing. For much of modern CRE history, we could roughly approximate demand as a function of employment growth. Why? During this period, the two most valuable (and arguably, important) sectors for CRE investment were office and retail, whose fortunes are both closely tied to the labor market. That’s not to say industrial and apartments are completely disconnected from the labor market, but their connections are somewhat more indirect and tenuous.

In the current era of CRE investment, office and retail find themselves out of favor with many investors.

In the current era of CRE investment, office and retail find themselves out of favor with many investors. As a result, some investors have looked at alternative property classes to fill that void. In the current era, property classes such as data centers, senior housing, self storage, student housing and even medical/health-care facilities have become more popular among institutional investors. And those property classes have diverse demand drivers, befitting a diverse set of property types.

That means demand for space is diversifying, which should make demand less volatile than bygone eras. That doesn’t mean labor no longer has an important role to play—it clearly does. Nor does it mean that CRE demand will stay stable. But it certainly changes the dynamics of the overall asset class. And it also alters the way investors need to think about and account for CRE demand. We wouldn’t call this a new era because this change occurred gradually over time. But the world of CRE today differs notably from the past.

Ryan Severino is the chief economist & head of research at BGO, where he is responsible for global and regional economic research, analysis and forecasting as well as property market research, insights and forecasting. Additionally, he is an adjunct professor at Columbia University and New York University. Severino holds a master’s degree from Columbia University, a bachelor’s degree from Georgetown University, and is a CFA charterholder.

Read the March 2026 issue of CPE.