As we closed out the third quarter of 2025, several long-running trends across commercial real estate began to pivot — some subtly, others decisively. Real estate and construction business owners continue to navigate a landscape shaped by interest rates, shifting consumer behavior, demographic changes and a federal policy environment that remains in flux.
In our recent webinar, we walked attendees through the factors shaping each major sector of the industry and offered a legislative outlook. Below is a sector-by-sector breakdown of the key themes we’re monitoring, what the latest data indicates, and how these shifts could affect investment, development and operational decisions heading into 2026.
For the first time since late 2021, office net absorption surged meaningfully into positive territory, exceeding 10 million square feet. This marks the strongest quarterly jump in occupancy since mid-2019 and signals the office market may finally be turning a corner.
Importantly, these gains are not driven solely by resilient medical office properties. Traditional for-lease buildings, including three- and four-star assets, saw positive absorption for the first time in 15 quarters. Even buildings more than 10 years old posted occupancy increases not seen since 2018.
Suburban office assets have outperformed throughout the post-pandemic period, but Q3 brought a new development: positive demand is returning to downtown properties as well. This shift suggests the steep occupancy losses experienced in major metros may finally be bottoming out.
Still, the recovery is uneven. New York continues to lead, posting its sixth consecutive quarter of occupancy gains, supported by strong office attendance and consistent hiring in financial services. Dallas also shows healthy growth. But large metropolitan areas such as Chicago, Los Angeles and Washington, D.C. remain in search of stability.
New leasing activity (excluding renewals) increased for the second consecutive quarter and is now roughly in line with last year’s levels. While volumes remain below pre-pandemic averages, the direction is positive.
On the supply side, the development pipeline continues to shrink. Office construction is down 65% from the 2019 peak, reflecting the combined weight of high interest rates, elevated labor and materials costs and continued uncertainty around long-term demand. Traditional for-lease office now accounts for just half of the pipeline.
Lower levels of new supply are helping lift occupancies for both lower-rated and older buildings; this trend is expected to continue into 2026.
Even as momentum builds, significant risks remain:
Still, investment activity is up 36% year-over-year through the first three quarters, and institutional buyers have re-entered the market. Many investors are positioning early for a multi-year recovery.
Retail experienced its strongest quarter of move-ins since 2022, while move-outs declined 4%. This pushed net absorption back into positive territory after two negative quarters.
Even though total available space is at a three-year high, availability remains nearly 12% below the 10-year average and still hovers just below 5%, which is close to a historic low. High quality retail space remains especially scarce: more than 40% of all available space is rated two stars or below, and less than a quarter of available space was built after 2000.
Leasing activity rose for the third straight quarter, hitting a three-year high. Spaces are leasing fast. The median time to lease dropped below seven months, and prime spaces often lease in under five. Smaller footprints continue to dominate:
Restaurants, fitness concepts and wellness operators lead demand, reflecting ongoing shifts in consumer preferences.
Rent growth continues to correlate closely with consumption growth. Southern markets, benefiting from strong population gains, remain the top performers. Midwest and Western markets have posted roughly 7% to 19% cumulative rent growth since 2019, with the West showing more variability. The Northeast continues to lag due to slower population growth and higher costs.
Retail still faces headwinds, including slowing job growth and consumer spending that has outpaced income gains. Lower-income households in particular face elevated borrowing costs. Yet, tight supply and broad tenant demand should help limit vacancy increases over the next few years.
Investment activity reached a multi-year high in Q3, reflecting improved buyer-seller alignment and a narrowing bid-ask spread. Capital should continue flowing toward retail given its strong fundamentals and limited future supply.
Containerized import activity at U.S. ports declined in recent months, creating near-term headwinds for warehouse and distribution demand. With fewer goods entering the country, some tenants are pulling back on space needs.
Net absorption dipped negative in Q2 but returned to positive in Q3. Still, demand is expected to remain muted entering 2026.
Demand has slowed most significantly for newly delivered, large-format logistics properties, where absorption is down 33%. Vacancy in this segment has risen nearly 400 basis points since late 2023, reaching about 8.5%.
In contrast, small-bay industrial (under 50,000 square feet) remains extremely tight, with vacancy below 5% and limited new supply.
Large logistics properties make up more than 60% of the construction pipeline, much of which is speculative. Available space under construction is roughly double the level seen in the five years preceding the pandemic.
As new deliveries hit a softening market, rent growth has cooled. National year-over-year growth slowed to just 1.4%, down sharply from a 10% peak in 2022. Declines are concentrated in bulk logistics, while small-bay rents remain positive.
Deal flow improved in Q3, though activity continues to split between smaller assets (under $10 million) and larger institutional-grade properties over $50 million. Mid-range assets remain slower to move. Once trade uncertainty eases and leasing momentum picks up, industrial should continue benefiting from historically strong rent performance and predictable capital expenditure requirements.
Net absorption fell 20% from Q2 but still surpassed 100,000 units for the seventh straight quarter. Southern markets continue to lead, capturing more than half of nationwide demand due to robust population growth.
Demographic forces remain firmly supportive:
High quality four- and five-star properties accounted for 85% of Q3 absorption. Three-star assets also saw positive demand. But one- and two-star segments posted continued weakness due to soft consumer sentiment and slowing immigration.
Construction starts are down 70% from peak levels, and total units under construction are down 53% from early 2023, now aligned with levels from a decade ago.
Deliveries are expected to fall 28% in 2025, with further declines in 2026. Oversupply will remain concentrated in the South and West, while the Midwest and coastal markets should see tightening vacancies.
Vacancies should peak in early 2026 before tightening as new supply slows. Rent growth may turn slightly negative near term but is expected to improve by mid-2026.
Transaction activity rose for the third straight quarter, suggesting pricing may begin stabilizing as the sector’s short-term lease structure enables faster response to capital market shifts.
Under normal circumstances, this time of year would involve year-end tax legislation or technical corrections. However:
Key issues needing attention include:
Industry groups are actively communicating these needs to lawmakers, but meaningful action may not materialize until early 2026.
Across every sector, the broader story of Q3 is one of inflection. Office shows early signs of a real recovery; retail remains tight; industrial is adjusting to global trade uncertainty; and multifamily is transitioning from peak supply toward a more balanced environment. Meanwhile, legislative progress remains possible but uncertain. While permanent tax provisions ease year-end anxiety, they also remove some of the traditional pressure that historically drove action.
As we continue to support clients across the U.S., industry participants must stay agile and informed. That will be critical as the market moves into a new phase defined by selective recovery, disciplined development and evolving federal priorities.
Thank you to CoStar Group and NAIOP for presenting with us on our recent national real estate and construction market update webinar.
Contact Dave Sobochan, Adam Hill or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.