What's Ahead for the Commercial Real Estate and 1031 Markets in Late 2025?

by Maura Snabes, Esq., CES, NTP

As we move into the second half of 2025, the commercial real estate (CRE) and 1031 exchange markets are navigating a landscape filled with both opportunity and uncertainty. Economic variables such as fluctuating interest rates, trade policies, and geopolitical shifts are making predictions difficult—yet, strategic investors remain active and adaptive.

According to J.P. Morgan Chase, ongoing economic uncertainty, evolving trade dynamics, and policy changes will continue to shape the investment landscape. However, despite these headwinds, the 1031 exchange remains a critical tool for savvy investors aiming to defer taxes and reposition their portfolios.

Key Trends to Watch in H2 2025:

• Resilient Exchange Activity: Expect 1031 exchanges to remain a core strategy, especially as investors seek ways to optimize returns amid shifting market conditions.
• Shifting Asset Classes: Traditional office spaces continue to lose favor. Investors are leaning into more stable sectors like multifamily housing, industrial properties, neighborhood retail, and passive options such as Triple Net Lease (NNN) assets and Delaware Statutory Trusts (DSTs).
• Reverse & Improvement Exchanges on the Rise: As interest rate volatility and limited supply of premium assets persist, more investors are using reverse and improvement exchanges to maintain momentum and upgrade their holdings.
• Wave of Maturing Loans: A large volume of CRE loans maturing in the coming months could trigger property sales, many of which will likely utilize 1031 exchanges to reposition or upgrade assets.
• Sustainability-Driven Investment: Green tax incentives are gaining traction, encouraging the exchange of energy-efficient buildings and environmentally focused infrastructure projects.
• Multifamily & Retail Resilience: Multifamily remains a strong performer, while retail—particularly neighborhood centers—continues to show staying power. Industrial properties are expected to stabilize after years of rapid growth.
• Emerging Opportunities: Look for potential bargains in office space and ongoing demand for workforce housing, as both affordability and repositioning continue to shape the CRE narrative.

Looking Ahead to 2026: What’s in Store for 1031 Exchanges?

• Policy Stability Expected: The 1031 exchange provision is likely to remain intact heading into 2026. With a Trump Administration that has historically supported real estate incentives, the political outlook currently favors preservation of this longstanding tax-deferral strategy.
• Focus on Real Property Continues: Since the 2017 Tax Cuts and Jobs Act restricted 1031 exchanges to real property, the emphasis has narrowed—and that’s expected to continue. Investors are leaning into real estate strategies with a clearer path to deferral.
• Transaction Volume Likely to Climb: While interest rates may fluctuate, the value of tax deferral and capital preservation will continue to drive exchange activity. Two additional motivators:
  • Bonus Depreciation Phase-Down: With bonus depreciation stepping down to 40% in 2025, 20% in 2026, and set to expire in 2027, investors are moving now to capitalize on remaining depreciation benefits.
  • Tax Strategy Optimization: As portfolio growth becomes increasingly tax-sensitive, 1031 exchanges offer one of the most effective tools for compounding wealth through deferral.

Final Takeaway
The remainder of 2025 presents a complex but opportunity-rich environment for 1031 exchange investors. Adapting to new asset preferences, leveraging tax strategies, and staying informed on policy and economic shifts will be essential. Whether navigating a maturing loan or seeking to shelter gains through reinvestment, the 1031 exchange continues to be a pillar of smart real estate investing—and it’s not going anywhere anytime soon.

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