MARKET OVERVIEW
Transaction volume for the four major asset groups at the end of May was about $32B, according to CoStar data, placing the full quarter’s activity well behind Q1’s performance.
The momentum from the first quarter was stilled as the Commercial Real Estate (CRE) market adjusted to seesawing bond rates1 and the country’s downgraded economic outlook, due to the White House’s changing trade policies. However, recent clarifications and tariff agreements could make current conditions short-lived. CRE participants remained engaged. According to Bisnow, Cushman & Wakefield’s CEO told shareholders, “What we're not witnessing is a freeze in decision-making.”
CoStar data showed that, by the end of Q2, Office activity may rival the momentum seen in Q1, possibly due to an annual price decline of over 9% in Q1. But the overall annual composite CCRSI rose again in April. Similarly, there was a divide in cap rates, with the risk indicator only ticking up for Office properties so far this year. Delinquencies again edged higher in Q1, due to industrial loans. Distress sales, despite investor appetite, swung down below 3% in April.
The adjustment in Office usage continued and vacancies hit 14% in April. But according to the National Association of REALTORS®2, demand in some cities rebounded, particularly New York, and even San Francisco’s prospects improved. Rents also stabilized. However, the government’s plans to terminate leases, particularly in central business districts, remained a mercurial influence on the sector’s future.
Both the Multifamily and Industrial sectors are the top investment targets this year, according to a recent NAIOP poll. Multifamily’s solid demand was evident as rents and vacancy2 stabilized. Per JLL, Industrial deliveries were on the downswing, slightly stiffening rents but still hurting the vacancy rate. But Industrial may be a clear beneficiary of the new trade policies. A variety of companies across many industries, from big pharma to auto manufacturing, committed to reshoring or initial investments this year.
In Retail, an extension of 2024’s store closing trend was viewed by many as a growth opportunity for an industry hampered by persistently low vacancy. Landlords have signed new tenants at attractive rents. The pull of the in-store experience remained strong, reflected in the flattening of E-commerce sales3. Indeed, the emergence of phygital (online stores like eyewear maker Warby Parker opening physical locations) testified to the adaptability of the sector.
A DEEPER DIVE: RETAIL RESILIENCY INDICATORS
The retail industry has proven very irrepressible. But with an economic slowdown predicted, which regions might be the most resilient going forward? The graphs below show where backfilling happened quickest and how new construction may or may not support this activity.
The Southeast and Northeast have had the least difficult time attracting new tenants and low (or lowering) new construction will reinforce this situation. The Tampa and New York metro markets might be the most resilient within these regions. The Southwest, Mid-Atlantic and Midwest may muddle through; all had mixed trends for time vacant, despite declining construction. For example, Chicago has had low construction, but still has relatively longer vacancy time. The West may struggle. Middling backfill activity could be exacerbated by more square footage coming online, particularly in the Los Angeles and San Francisco areas.
WHAT'S NEXT?
Stay tuned for next month’s Economic Update Q2 2025 to see how the commercial real estate market wraps up the quarter.
1 Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS10, May 28, 2025.
2 Copyright © 2025 “March 2025 Commercial Real Estate Market Insights.” NATIONAL ASSOCIATION OF REALTORS®. All rights reserved. Reprinted with permission. May 2025, https://www.nar.realtor/research-and-statistics/research-reports/march-2025-commercial-real-estate-market-insights
3 U.S. Census Bureau, E-Commerce Retail Sales as a Percent of Total Sales [ECOMPCTSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/ECOMPCTSA, May 30, 2025.