Economic Outlook for Real Estate in North America: How Interest Rates and Inflation Are Shaping the Market

The real estate market in North America has been navigating a complex landscape shaped by fluctuating interest rates, persistent inflation, and evolving economic conditions. As of early 2025, the interplay between these factors continues to influence property values, investment strategies, and market dynamics across residential, commercial, and industrial sectors. This article examines the current economic outlook for real estate in North America, with a particular focus on how interest rates and inflation are driving market trends. Additionally, it explores RentPERKS' innovative approach to navigating these challenges and capitalizing on opportunities in the rental market.

Economic Context: Interest Rates and Inflation

Interest rates and inflation are two of the most significant drivers of real estate market performance. In 2024, the U.S. Federal Reserve (Fed) began a series of rate cuts after a prolonged period of high interest rates aimed at curbing inflation (abrdn, Q2 2024). These cuts, which started in mid-2024, were a response to cooling inflation rates, with core measures trending closer to the Fed’s 2% target (Cushman & Wakefield, 2025). However, inflation remains a concern, particularly in the services sector, where price growth has been more persistent (abrdn, Q2 2024).

The Fed’s pivot to rate reductions has provided some relief to real estate markets by lowering borrowing costs, which had previously constrained transaction activity and property valuations (PwC, 2025). However, the economic slowdown signaled by these cuts has raised concerns about net operating income (NOI) growth, particularly in sectors sensitive to economic cycles, such as office and retail (PwC, 2025). Meanwhile, inflation continues to exert upward pressure on construction costs and rents, creating a dual-edged sword for investors and developers (Avison Young, 2022).

In Canada, similar dynamics are at play, with theBank of Canada also adjusting rates in response to inflation trends. TheNorth American real estate market, valued at USD 3.90 trillion in 2023, is projected to grow at aCAGR of 2.6% to reach USD 4.91 trillion by 2032, driven by steady economic growth and sustainable development initiatives (Expert Market Research, 2024).

Impact of Interest Rates on Real Estate

Interest rates directly influence the cost of borrowing, which affects both property buyers and investors. In the residential sector, higher mortgage rates have historically reduced affordability, leading to slower home sales and price corrections (U.S. Bank, 2022). As of January 2025, the median monthly mortgage payment in the U.S. reached $2,686, a 7.6% increase from the previous year, reflecting the combined impact of elevated rates and rising home prices (U.S. Bank, 2022). However, the Fed’s rate cuts in 2024 have begun to ease these pressures, with expectations of further reductions in 2025 and 2026 (abrdn, Q2 2024).

In the commercial sector, interest rates have a significant impact on capitalization rates (cap rates) and property valuations. Higher rates increase the cost of debt financing, which can depress property values, particularly for assets with high leverage (Forbes, 2022). Office markets, already struggling with remote work trends, have been particularly vulnerable, with some properties in weaker markets selling at steep discounts (abrdn, Q2 2024). Conversely, industrial and logistics markets, especially those near major ports, have shown resilience due to strong demand from e-commerce and nearshoring trends (abrdn, Q1 2024).

Real Estate Investment Trusts (REITs) have also been affected by interest rate fluctuations. When rates rise, REIT yields become less attractive compared to fixed-income alternatives, leading to price declines. However, as rates stabilize or decline, REITs are poised to recover, offering investors diversification and income potential (U.S. Bank, 2022).

Inflation’s Role in Shaping the Market

Inflation has historically been a double-edged sword for real estate. On one hand, it acts as a hedge against rising prices, as property values and rents tend to increase over time (Avison Young, 2022). Research from The Wharton School highlights that REIT dividends have consistently outpaced inflation, with dividend increases averaging 7.71% annually between 1978 and 2011, compared to a 3.92% inflation rate (Forbes, 2022).

On the other hand, inflation-driven cost increases—particularly in construction materials and labor—can limit new development, reducing supply and pushing up property values in high-demand areas (Avison Young, 2022). This dynamic has been evident in the multifamily sector, where limited new construction due to high costs has led to rent growth in markets with strong demand, such as East Coast population hubs (abrdn, Q2 2024).

However, the type of inflation matters. Demand-pull inflation, driven by strong economic growth, generally benefits real estate by increasing demand and rents. In contrast, cost-push inflation, characterized by rising costs without corresponding demand growth, can strain landlords’ ability to raise rents, particularly in weaker economic conditions (Avison Young, 2022).