Commercial Real Estate: A Cautious Climb Towards Stabilization
After a period of significant disruption, the commercial real estate (CRE) market is showing signs of stabilization, albeit a slow and uneven one. Recent data from Moody’s indicates a 17% increase in deal volume in 2025 compared to the previous year, signaling a potential turning point. However, this growth remains 30% below pre-pandemic levels (2019), highlighting the challenges that still lie ahead.
The Resurgence of Office Space – Driven by AI and Return-to-Office
Contrary to earlier predictions of a permanent decline, the office sector is experiencing a surprising recovery. A key driver is the growing demand for space from companies investing heavily in Artificial Intelligence (AI). Return-to-office mandates are also playing a role, albeit a complex one. Office deal volume rose 21% in 2025, but this demand is heavily concentrated in Class A, or “trophy,” assets. Older, less desirable office buildings continue to struggle.
Pro Tip: Investors looking at the office sector should prioritize high-quality, well-located properties with modern amenities to capitalize on this trend. Consider areas experiencing significant tech sector growth.
Multifamily Maintains Momentum Despite Headwinds
Despite declining occupancy rates and rental growth in some markets, the multifamily sector remains a strong performer. Deal volume increased by 24% in 2025. This is partly due to higher mortgage rates in the single-family housing market, which are keeping potential homebuyers in the rental market longer. However, the construction of new multifamily units is a concern, potentially leading to oversupply in certain areas.
Retail’s Unexpected Resilience
The “retail apocalypse” narrative has proven to be premature. Retail saw a healthy 19% gain in deal volume in 2025, fueled by the strength of grocery-anchored and necessity-based retail centers. Investors are recognizing the enduring importance of physical retail, particularly for essential goods and services. This shift in perception is a significant development.
Did you know? Grocery-anchored retail centers have consistently outperformed other retail segments during economic downturns, making them a relatively safe investment.
The Rise of Alternative Assets: Data Centers and Medical Offices
Investors are increasingly looking beyond the traditional core CRE sectors (office, industrial, retail, multifamily, hotel) to alternative assets. Data centers and medical office buildings are leading the charge. The largest CRE deal of 2025 was a $296-property medical office portfolio acquisition by Remedy Medical Properties from Welltower, demonstrating the growing appetite for healthcare-related real estate.
The demand for data centers is being driven by the exponential growth of cloud computing, AI, and the Internet of Things. Tech giants like Amazon and Google are actively acquiring land and building data centers to support their expanding operations. A notable example is SDC Capital Partners’ $615 million purchase of 97 acres of entitled data center land in northern Virginia.
Big Deals are Back, But Still Lagging
Sales of properties exceeding $100 million increased by 23% in 2025, indicating a return of institutional investors to the market. However, this segment remains 50% below 2019 levels. Smaller deals (under $5 million), favored by private capital and individual investors, are now exceeding 2019 volume by 4%, suggesting a more active and liquid market at the lower end.
Corporate Owner-Occupiers Enter the Fray
A notable trend in 2025 was the increased activity of corporate owner-occupiers, particularly in the tech sector. Apple, for instance, deployed over $1.1 billion in Santa Clara County, California, acquiring office buildings and R&D campuses. This strategy allows companies to secure their long-term operational footprint and capitalize on market corrections. Microsoft followed suit with similar acquisitions.
What’s Next for Commercial Real Estate?
The outlook for 2026 is cautiously optimistic. Experts anticipate a moderate acceleration of the current momentum, driven by potential interest rate cuts and fiscal policies. However, a return to the era of ultracheap capital is unlikely. Portfolio rebalancing is also underway, with institutional investors selling assets to private equity firms eager to deploy capital.
Frequently Asked Questions (FAQ)
Q: Is now a good time to invest in commercial real estate?
A: It depends on your risk tolerance and investment strategy. While the market is stabilizing, challenges remain. Focus on high-quality assets in growth sectors.
Q: Which CRE sectors are expected to perform best in 2026?
A: Data centers, medical office buildings, and well-located Class A office properties are expected to outperform. Retail, particularly grocery-anchored centers, also shows promise.
Q: What is driving the demand for data centers?
A: The growth of cloud computing, AI, and the Internet of Things is fueling the demand for data storage and processing capacity.
Q: Are interest rates still a major concern?
A: Yes, while potential rate cuts are anticipated, interest rates will likely remain elevated, impacting financing costs and investment returns.
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