This year should be where market behaviors provide more clarity in the direction of CRE - by William Pastuszek Jr.

The best that can be said about 2025 is that it was a year of adjusting to the realities of the marketplace. One source called it a year of “recalibration” after a “downshift” in the prior year. A lot of trade news generated last year was reactive in nature, often based on very short term trends that represented in hindsight, “one-off events,” or overreaction to incomplete information.

The big question is will things get markedly better in 2026? Here is some generic data on sectors that seem to be good indicators of the health of real estate markets.

Multifamily retains a lead in transaction volume, with a significant surge in activity value – some sources say +-50% Y-O-Y. Sources report national high inventory growth counterbalanced by a drop in construction starts and increased vacancy. Overbuilt markets – found the South and Southwest – bear watching while coastal markets are performing reasonably well.

The office sector is no longer in a freefall but there are plenty of troubled assets out there. There is some “bifurcation” in the markets, where the “trophy” downtown market shows hopeful activity but the older Class B and lower markets are less positive. Office conversions help give life to these older, obsolete buildings, but this trend is only part of the ongoing process to stabilize this sector.

Industrial assets have “normalized,” after reaching pandemic-era highs. National vacancy has risen over the past few years. In Boston, the Beige Book reports industrial markets are less “dynamic” than in the recent past. Other survey data shows negative absorption, with high vacancy at the top end than in the lower – “smaller bay”  – end. Smaller, local owner-occupant space shows stronger demand than space at the higher end.

Capital and Cap Rates. The Fed’s easing of the short-term discount rate has provided some clarity in markets. However, real estate risk is captured more properly in the level and direction of longer-term rates. Cap rates have flattened. Some sources report some compression in overall rates. Lenders are cautious but willing to be convinced on many deals. The 10-year treasury fluctuated significantly in 2025, expressing the uncertainty in markets. If rates drop significantly, there will be a rush for refinancing. The big bulge in loan maturities is of concern; lower rates will certainly help many of those properties and the loans on them.

Housing. Lower rates and some private and government interventions have helped. The cost of housing, however, begs the issue of affordability for both homeowners and renters. There is no clear overarching solution. In Massachusetts, volumes and pricing were very slightly positive for the 1-4 family market but the statewide condominium market was flat, according to the Warren Group. Let’s see what housing markets look like this time next year.

Technology. Looking ahead, firms are increasingly leveraging artificial intelligence (AI) to enhance operational productivity; this is true for real estate as well. It is anticipated that these technologies will fundamentally reshape workforce management over the coming years. AI is in the process of transforming all aspects of real estate, from property management and brokerage, and, to appraisal, and lending. It should be used wisely and competently.

Summary. This year should be where market behaviors provide more clarity in the direction of commercial real estate. Most markets should more towards greater stability based on sound fundamentals and reasonable expectations about the future. Real estate analysts should carefully monitor leading edge indicators as markets adjust to differing levels of risk. Factoring in real estate risk based on external forces and property specific dynamics is key in this environment. Economic and geo-political uncertainties will continue to influence markets. And don’t rely on Artificial Intelligence to do the hard work of analyzing and drawing realistic and logical conclusions.

William Pastuszek Jr., MAI, ASA, MRA heads up Shepherd Associates LLC, Needham, Mass.