Period of Adjustment – July 7, 2025
The core commercial property sectors performed in accordance with weakening demand in the second quarter of 2025
It’s not exactly the kind of midyear report that induces a collective smile, although for some commercial real estate investors it may portend more buying opportunities down the road. Conversely, the just-issued Moody’s Analytics CRE Preliminary Trends Report for the second quarter of 2025 does suggest that the fundamentals remain sound, albeit challenged.
The introductory paragraph to the report, prepared by Thomas P. LaSalvia, PhD, head of commercial real estate economics at Moody’s Analytics, sums up what follows:
Commercial real estate performance reflected weakened demand in the second quarter of 2025 as macroeconomic uncertainty dampened household and business confidence. Across core property types, rent growth was generally positive but below long-run trends, consistent with elevated vacancy rates. Market weakness was particularly acute for office, where the vacancy rate hit yet another record high. Retail has finally rightsized, but underperformance persists. While industrial did show signs of adjusting to prolonged tariff uncertainty amid international negotiations, rent and occupancy were stagnant. More positive performance was found in the multifamily market, which is stabilizing after experiencing years of strong completions. For capital markets, long-awaited interest rate cuts crucial to CRE have been kept at bay as prospective inflationary pressures from tariffs and a reduction in real consumer spending have left the Federal Open Market Committee in a period of wait-and-see.
Among the four main property types, the two with the most noteworthy stories are the most widely popular (multifamily) and the most bifurcated (office). Even as some trophy properties continue to outperform, the national vacancy rate for office rose 20 basis points from Q1 to 20.6%, setting another record for the sixth consecutive quarter after breaking historic pre-pandemic peaks. “Americaʼs corporations are holding up well, but the requirement for workforce and office space is not growing linearly, causing an extended performance slump in the office sector,” writes LaSalvia.
On a more local level, Dallas was the only market to pass the one-million-square-foot mark for absorption during Q2, while the Manhattan office market faltered after strong Q1 performance. Six markets nationwide saw their local vacancy rates rise by 100 bps or more, with half of those on the West Coast.
The news was more upbeat for multifamily overall. Thanks in part to a tapering of completions, the vacancy rate stayed flat at 6.5% during Q2 and asking rents ticked upward 0.6% from Q1.
That said, Moody’s Analytics noted that among the 79 primary markets that it tracks, 61 had higher vacancies than in the year-ago period, although 51 of the 79 either experienced no change in vacancies or saw vacancies decline from Q1. That indicates “positive momentum,” LaSalvia writes. Similarly, apartments posted the lowest nationwide vacancy and the fastest year-over-year rent growth of the four major sectors.
Underpinning the property metrics—and their upward, downward or lateral movement—is a story of resilience. “The broader CRE market continued to adjust under heightened macroeconomic, geopolitical and policy uncertainties in the second quarter,” writes LaSalvia. Such adjustment is likely to mean relative gains and relative losses among asset classes and at the individual property level as 2025 moves into its second half.