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Commercial Real Estate Finds Its Footing as Fed Shifts Gears
After years of uncertainty, commercial real estate is showing genuine signs of recovery. August delivered the sector’s strongest annual price gains since late 2022, and with improving fundamentals across multiple property types, market participants are cautiously optimistic that the worst may be behind them.
Prices Climb as Momentum Builds
According to MSCI’s RCA CPPI report, the National All-Property Index rose 2.4% year-over-year and 0.9% month-over-month in August. If that monthly pace holds, it would translate to an annualized increase of 11.1% — a dramatic acceleration from last year’s sluggish performance.
Retail continues its winning streak. Retail assets led the charge with a 5.3% annual gain, marking their 15th consecutive month of growth. While the pace has moderated slightly from late 2024, it still more than doubles last year’s rate — a testament to the sector’s resilience amid changing consumer behavior.
Industrial finds its rhythm again. Industrial properties posted a 5% year-over-year increase and gained 0.8% month-over-month, the strongest showing since December 2024. After steadily climbing since April, the sector appears positioned for potential double-digit gains if current trends persist.
Multifamily stabilizes after turbulence. Multifamily prices edged up 0.2% annually while holding flat from July. The stabilization reflects improving market conditions and a more supportive interest rate environment — positive signals for future valuations in a sector that’s been searching for direction.
Office remains the outlier. CBD office prices rose just 0.7% year-over-year, while suburban office gained 0.3%. Both remain significantly below pre-pandemic peaks, though suburban properties have shown marginally better performance. Recovery here will be measured in years, not quarters.
Geographically, secondary markets outpaced their larger counterparts, gaining 3.6% annually. The six major metros — Boston, Chicago, Los Angeles, New York, San Francisco, and Washington D.C. — collectively dropped 1.5%, though monthly growth turned positive starting in April, suggesting these markets may have bottomed out.
Press enter or click to view image in full sizeThe Supply Crunch Ahead
While prices recover, multifamily faces a different challenge: strong demand is colliding with the slowest construction pipeline in nearly a decade.
Cushman & Wakefield’s Q2 report reveals more than 116,000 units were absorbed in the quarter, bringing year-to-date absorption to 216,000 units — matching last year’s robust performance. Yet new construction has dramatically slowed, with fewer than 500,000 units under development nationwide, the lowest total since 2016.
The numbers tell a compelling story. New deliveries climbed 18% quarter-over-quarter to 115,000 units but still marked a 22% year-over-year decline. Projects under construction now represent just 3.8% of total inventory, down sharply from over 7% in 2023. This mismatch stems largely from financing challenges that have caused new starts to plummet.
Major markets are feeling the pinch. Dallas/Fort Worth saw its pipeline shrink by 22,000 units, while New York and Austin each declined by roughly 18,000 units. Phoenix, Atlanta, Houston, and Washington D.C. all dropped by 10,000-plus units.
Despite strong absorption, rent growth has cooled to 1.7% annually, down 50 basis points from Q1 and marking the sharpest deceleration since 2023. However, core markets remain hot: San Francisco led with 6.8% annual rent growth, San Jose and Chicago hit 4.5%, and New York and Northern New Jersey topped 3.5%. Tight supply and steady demand continue driving rent increases in gateway cities.
What’s Driving the Recovery
The improving rate environment has helped ease pressure on underwriting and refinancing efforts across the sector. High interest rates had suppressed transaction volume and new development activity across all property types, but conditions are now shifting in favor of renewed dealmaking.
Short-term borrowers are seeing relief, and developers are gaining confidence to revisit paused projects. This is particularly important given the supply constraints building in key sectors like multifamily, where development starts are down over 35% year-over-year.
The sector-by-sector outlook varies considerably. Industrial demand shrank in Q2 for the first time since 2010, though improving financing conditions and greater tariff clarity could support a turnaround by early 2026. Multifamily’s declining construction pipeline suggests tighter conditions ahead, potentially paving the way for a rent rebound in 2026. Office continues targeting stabilization rather than recovery, with improved financing helping refinancing efforts while structural challenges persist. For investors and operators, the message is clear: the door is opening for dealmaking to pick up and valuations to stabilize. With strong demand colliding with shrinking supply in multifamily, and industrial and retail showing consistent gains, the setup for 2026 looks increasingly favorable.