Commercial Market Snapshot Q3 2025

MARKET OVERVIEW

Transactions for the four major asset groups were on pace to be about $65B, a 12-month growth rate of almost 14%, according to CoStar data. However, the figure will likely inch closer to last quarter’s $78B, once dealmakers return from summer sojourns. While momentum slowed due to shifting tariff policy, finalized agreements were not as onerous as expected and the economy expanded by 3.3% in Q2. As summer temperatures rose, so did the commercial real estate (CRE) industry’s outlook; major brokerage firms upped their earnings guidance for Q3 and Q4. One investor recently confirmed that “… the market has turned a corner.” Anticipation of a rate reduction by the Federal Reserve in September is expected to further boost sales activity.

Prices recovered in July, reversing a four month downward trend, as measured by CoStar’s CCRSI. Office values continued to soften however, propelling the sector to lead 12-month transaction volume growth this quarter again. CoStar data showed that cap rates held firm in Q3, although they were elevated from last year for the Office sector. In Q2, bank delinquencies1 measured 1.6%, staying above their 10-year average. However, banks and CMBS holders were committed to loan modifications and extensions, which doubled in Q1 compared to a year earlier, keeping distress deal-making relatively quiet.

Retail, thanks again to a dearth of deliveries and solid retail spending, had the hardiest rent growth and vacancy figures2 of all the major sectors. Multifamily vacancies and rents stabilized by June, helped by rising net absorption and the 30-year fixed-rate mortgage waving over 6.7% in July. Industrial felt the impact of large retailer bankruptcies and delayed commitments caused by tariff unease. Per the National Association of REALTORS®, the vacancy rate2 hit 7.4% and rental growth slipped to 1.7% in Q2. The situation is temporary however, with supply additions moving to a sustainable level and recent tax changes fostering new manufacturing commitments. Office’s recalibration continued and concerns in many markets lingered. Annual rents in June2 weakened by 0.6%. But NAIOP foresees “the end of the post-pandemic doldrums in Office.” Those looking to hold or grow space increased, and the vacancy rate appears to have  peaked at 14.1%, according to CoStar forecasts.

A DEEPER DIVE: CBD OFFICE ACTIVITY GROWTH

New York City’s Central Business District (CBD) recovery has made headlines in the CRE press. Does this rebound herald the same in other CBDs? Perhaps. The graph below illustrates the market dynamics in some of the larger CBDs, or ones that experienced significant net absorption in the last year. The Saint Louis, San Francisco and Miami markets had similar profiles to New York, where net absorption jumped and transaction volume climbed over 50%. 

Graph showcasing CBD Office Activity 12-Month Growth from Q2 2024 to Q2 2025.

The key to revivals in these cities is net absorption driven by both demand and tapering supply. For example, San Francisco’s attractiveness to the AI crowd and virtually zero new deliveries in two years brightened its prospects. Other markets had a mismatch between their fundamental strength and sales activity. Chicago, Washington, D.C. and Los Angeles (LA) also had falling deliveries, but demand was weak, keeping vacancies solidly above the national average.

Declining prices were responsible for transactions. In the case of LA, one large, distressed deal accounted for the sales volume surge. Besides that, activity was uneven and net absorption in the last year remained significantly negative.

WHAT'S NEXT?  

Tune in to next month’s Economic Update blog to see how the third quarter ends and what’s on the horizon for CRE in the final quarter of 2025.  

 

 1 Board of Governors of the Federal Reserve System (US), Delinquency Rate on Commercial Real Estate Loans (Excluding Farmland), Booked in Domestic Offices, All Commercial Banks [DRCRELEXFACBS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DRCRELEXFACBS, August 27, 2025.

2 Copyright © 2025 July 2025 Commercial Real Estate Market Insights.” NATIONAL ASSOCIATION OF REALTORS®. All rights reserved. Reprinted with permission. August 2025, https://www.nar.realtor/research-and-statistics/research-reports/july-2025-commercial-real-estate-market-insights