Q2 2025 National Real Estate & Construction Market & Legislative Update

The national real estate and construction industry is navigating a complex landscape of changing market dynamics and evolving legislative frameworks. In Q2 we saw the office sector adjusting to new demand patterns, the retail sector responding to the economic slowdown, the industrial sector shifting toward greater space efficiency, and a showing of strong demand for the multi-family sector. As we move forward, key legislative developments from the One Big Beautiful Bill Act (OBBBA) will also impact the industry’s future trajectory. Below are key takeaways from Q2.

Office Sector

The office sector continues to adjust to changes in occupancy and demand, experiencing:

• Negative net absorption, although losses are not as severe as in previous periods.
• A slowdown in new inventory additions, which will minimize net new deliveries in the coming years.
• Leasing activity that is lagging behind pre-pandemic levels, with a five to 10% decrease in new lease transactions compared to the pre-pandemic average.
• A shrinking of the average lease deal size by 15 to 20% compared to pre-pandemic levels.
• More than one third of pre-pandemic leased space has yet to expire.

Retail Sector

The retail sector is also seeing an overall slowdown, with the exception of leasing activity. Key developments include:

• A slowdown in economic activity, with a 1.2% annualized GDP growth rate in the first half of 2025.
• A decrease in consumption and income growth, with income trending below consumption.
• Net absorption in retail falling negative in the past two quarters due to increased store closures.
• Leasing holding steady, propelled by demand for recently vacated spaces.
• Leasing continuing to be dominated by smaller format space, with over two-thirds of leases signed in Q2 for spaces 2,500 square feet or less.

Industrial Sector

This sector dealt with uncertainty, with efficient spaces showing the most promise. In Q2 the industrial sector experienced:

• Uncertainty around trade policies weighing on net absorption, which fell negative in Q2.
• Decrease in demand for large box logistics space due to declining imports.
• Tenants showing preference for efficiency, occupying smaller spaces with higher clear heights.

Vacancy is expected to rise to around 8% in the next 12 to 18 months.

Multi-Family Sector

In the multi-family space, there were both pros and cons to address, including:

• Strong demand during the peak leasing season, with net absorption accelerating for the third consecutive quarter.
• Class A demand drove much of the acceleration, with vacancy falling to around 11% in the first half of 2025.
• An ongoing slowdown for construction, since 2022, with units under construction at the lowest level in about a decade.

Other Factors Potentially Impacting Your Real Estate Business or Fund

The OBBBA

Certain provisions with potential significant impact to the real estate and construction industry were left out of the OBBBA passed in July, including the Sec. 899 retaliatory tax against countries with unfair tax policies, and carried interest provisions. The Act also made the Sec. 461(l) limitation on excess business losses permanent but fortunately removed a potentially harmful change to the section prior to final passing.

However, in addition to key omissions, the OBBBA also introduced or revised other tax provisions important to the industry:

• Opportunity Zone Program (QOZ) Update: Many pertinent changes were made to the QOZ program, including the narrowing of the definition of low-income census tracts and the introduction of a qualified rural opportunity fund. Importantly, the OBBBA made this program permanent, providing more certainty for fund managers, investors and other stakeholders that QOZs are here to stay.
• Qualified Production Property Provision: Sec. 168(n) for qualified production property allows for accelerated depreciation for U.S. manufacturing facilities. It’s important to note that only owner-occupied buildings would currently benefit, the written binding contract rule applies, and the special acquisition rule is intended to allow used property to be considered qualified production property.
• REITs: The OBBBA also impacted Real Estate Investment Trusts (REITs) by increasing the value of securities issued by a taxable REIT subsidiary from 20 to 25%. This will provide additional structuring flexibility for REITs.
• Accounting Method Change for Condominium Developers: There is a new exception to the percentage of completion method of accounting for certain residential construction contracts and extends the allowable project duration under the small contractor exception from two to three years. Making an accounting method change for tax purposes could impact taxable income.

Real Estate Tokenized Funds

Another hot topic that continues to be an area of interest is real estate tokenized funds, which are digital representations of real estate assets using blockchain technology. There are both tax and legal structuring considerations to address to properly comply with IRS and SEC regulatory requirements. Work closely with your advisers if you are interested or involved in this area of real estate.

As the real estate and construction industry continues to navigate the complexities of a changing landscape, understanding the nuances of each sector and staying abreast of legislative developments is crucial. The trends highlighted above underscore the need for adaptability and strategic planning. Furthermore, the legislative updates from the OBBBA — including changes to the QOZ program, tax provisions for owner-occupied manufacturing facilities, and potential impacts on REITs and residential developers — will likely have significant implications for industry stakeholders. By staying informed about these developments, industry participants can better position themselves to capitalize on emerging opportunities and mitigate potential risks.

Read “One Big Beautiful Bill Up Close: Tax Impact for Real Estate” or find all of our OBBBA information in our OBBBA Resource Center.

Thank you to CoStar Group and ICSC for presenting with us on our recent national real estate 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.