INSIGHTS

On May 05, 2025

AAM Viewpoints — 2025 2nd Quarter Global Economic Outlook & Implications for Commercial Real Estate

Highlights

• Trade policy remains uncertain
• Scenarios look broadly favorable
• Central banks face complex math
• Downside risk remains notable
• Commercial Real Estate (CRE) could fare relatively well

To date, the situation remains highly variable, creating significant uncertainty. Therefore, these unusual times call for somewhat unusual analyses. In that spirit, this quarterly global outlook will take a somewhat different approach. We have used our proprietary global econometric model to produce three broad scenarios: a base case, an upside case, and a downside case. Each scenario includes a discussion of the underlying assumptions, the current analysis and outlook, and the broad implications for the global CRE market.

BASE CASE

Key Assumptions: The base case assumes that the current tariff regime remains in place with the U.S. imposing 10% tariffs on the majority of its trading partners with the exception of: (1) its fellow USMCA members, Canada and Mexico, at effective tariff rates slightly greater than 10% and (2) China with an effective tariff rate above 100%. This scenario also assumes reciprocal tariffs from: (1) China, Canada, and Mexico (2) from other key trading partners, but on a more targeted basis.

Overview And BGO’s Outlook: We expect the global economy would still expand and avoid a recession in the near term, but growth would slow, near 2% in 2025 and 2026. Most of this slowdown stems from the U.S., which seems likely to experience negative supply and demand shocks from its own tariffs and reciprocal tariffs. Global inflation in 2025 would grow at a slightly faster pace than a scenario without increased tariffs, mostly due to U.S. inflationary pressures. But that would only persist until 2026 when tariff-driven price hikes become part of the base for yearly inflation calculations. Inflation then would head back toward 2%. Most major central banks, including the European Central Bank (ECB) and the Bank of England (BOE) would face greater risks to economic growth than inflation, allowing them to continue easing monetary policy. Even the Federal Reserve (Fed) seems likely to see through the temporary disruption to price stability, especially as the economy slows. But uncertainty seems likely to prevail until the economy can reach some semblance of policy stability.

CRE Expectations and Implications: The outlook for global CRE would remain largely positive, even if less so than in a scenario that avoided tariff increases. With major economies facing more risk to growth than inflation, interest rate cuts would likely support global CRE capital markets, including lower cap rates and higher valuations. While the risk premium would rise in certain countries, it would fall in others. In turn, that broad dynamic would boost transaction volumes, debt originations, and appreciation returns. Meanwhile, although GDP growth would slow, we would expect little, if any, impairment to net operating income and income returns. Although this would not avoid mortgage defaults, it would not prove catastrophic either. That would largely mirror the environment after the dot-com bubble burst — although GDP growth slowed during that period, appreciation and total returns for CRE fared well on both an absolute basis and relative basis versus other major asset classes (such as publicly traded equities).

UPSIDE CASE

Key Assumptions: The upside case assumes a more benign international trading environment. Bilateral trading deals between the U.S. and various trading partners, including the key nations of Mexico and Canada, are reached within the next two quarters. Most of the world does not implement reciprocal tariffs on the U.S., except in specific, very targeted circumstances. China would remain the glaring exception, with the U.S.-China trade tensions that began at the end of the prior decade intensifying on a more durable, long-term basis.

Overview And BGO’s Outlook: Global economic growth would slow only slightly in the short term, closer to 2.5% in 2025 and 2026. Most of this slowdown would stem from increased U.S.-China trade barriers and tensions. Global inflation would experience only modest upward pressure relative to a baseline where the prior global tariff regime persisted. The ECB and BOE would continue their path of leading monetary easing. The Fed would follow but have flexibility to continue its own pre-tariff easing cycle. Uncertainty spikes in the second quarter but then diminishes as policy changes stabilize.

CRE Expectations and Implications: Although returns fail to fully replicate the record-setting performance from the 1980s, CRE begins another durable run of impressive performance across virtually all key metrics. The expanding global economy supports space-market fundamentals and income returns. As inflation continues to decelerate, declining interest rates support broadly positive capital markets performance, including rising valuations and appreciation returns. Risk premiums compress. The CRE debt markets would not come through this scenario completely unscathed, but issues would predominantly stem from idiosyncratic factors, either from the underlying collateral or from the individual loans. Overall, CRE continues its robust recovery which began in early 2024.

DOWNSIDE CASE

Key Assumptions: The downside case assumes a more negative international trading backdrop. The 90-day deferment for most countries ends and tariffs of at least 10% get implemented on all U.S. trading partners. Tariff exemptions for specific products also end. Very few new trade deals are reached in the short term. Retaliatory tariffs become widespread. The U.S. and China remain dug in, with each side refusing to concede in negotiations. Higher trade barriers become a pervasive, durable feature of the global economy.

Overview And BGO’s Outlook: Global economic growth slows to near 1% in 2025, but the global economy still avoids an official recession. Growth would rebound toward 1.7% in 2026. Inflationary pressures take root across a wider array of countries, making global inflation harder to slow. Inflation would remain above 2% for the next few years. Major central banks must walk a delicate balancing act, trying to achieve or sustain full employment while also trying to maintain price stability. Monetary policy still skews toward loosening, but the calculations become more difficult in such an environment. Interest rates broadly decline, but greater inflationary pressures push the timing of rate cuts outward.

CRE Expectations and Implications: Beyond the considerations noted above and their commensurate impact on returns, the key variable in this scenario is the impact on investor sentiment and enthusiasm for the asset class. This environment would create even greater uncertainty, which we know is a paralyzing force in the economy. Investors would likely become even more circumspect, with a greater flight to cash and liquidity than in either of the two previous scenarios. CRE would still likely fare well relative to other major asset classes, but this environment would not prove optimal for maximizing returns.

CLOSING THOUGHTS

Uncertainty in economic policy remains at crisis levels. While some stability in policy has seemingly emerged over the last few weeks, confidence that the environment is calming down remains brittle. Trade policy could realistically go in any number of directions over the coming quarters. The bad news is that most of these potential paths offer more headwinds to growth than in a world without rising tariffs. The good news is that CRE could still fare relatively well across scenarios, making it an attractive option for many investors.

CRN: 2025-0502-12534 R