CRE Sentiment Improves, but Activity Remains in Check: ValTrends Webinar, 3Q 2026

Commercial real estate (CRE) investor sentiment showed signs of improvement in the second quarter, with the asset class returning to the top of investors’ preferred alternatives and views across major property sectors becoming more balanced. Yet elevated interest rates, geopolitical uncertainty and selective capital markets continue to restrain transaction activity. 

That’s according to the ValTrends First Look webinar held July 21, led by Peter Muoio, PhD, Senior Director, SitusAMC Insights, and Jen Rasmussen, PhD, Vice President, SitusAMC Insights. The webinar examined the weakening labor market, inflation and interest rates, capital availability, transaction and pricing trends, distress indicators and the outlook for apartments, office, retail and industrial properties. 

Labor Market Weakens as Participation Declines 

Employment growth has decelerated markedly over the past four months. The U.S. economy added just 57,000 jobs in June, less than half of economists’ expectations and only about 40% of the average monthly gain recorded year to date. 

The broader trend is even weaker. Over the past year, employment growth has averaged approximately 37,400 jobs per month, compared with nearly 125,000 per month over the past decade and more than 94,000 over the past 20 years, a period that includes the Global Financial Crisis. 

The unemployment rate declined 10 basis points to 4.2% in June, but the improvement was driven partly by a falling labor force participation rate rather than stronger hiring. 

“It’s a decidedly soft labor market,” Muoio said. “What’s really driving the low and even declining unemployment rate is that the labor force participation rate has been falling, and that is a negative indicator for the strength of the economy.” 

Lower Energy Prices Temper Inflation, for Now 

Consumer price index inflation slowed to a 3.5% annualized rate in June from 4.2% in May. The producer price index also declined 0.3%. However, both improvements were driven largely by lower energy prices following a memorandum of understanding between the U.S. and Iran that temporarily eased the conflict and helped restore oil flows. 

Since the beginning of the Iran War, inflation has increased 20 basis points, and renewed conflict in the Persian Gulf could reverse June’s improvement. With oil shipments through the Strait of Hormuz disrupted and oil, gasoline, diesel and aviation fuel prices rising, inflation is likely to accelerate in July. 

Economic policy uncertainty also fell in June to its lowest level since President Trump took office, reflecting the temporary easing of geopolitical tensions. The renewed conflict raises the question of whether uncertainty will rise sharply again or whether markets are becoming less reactive to repeated disruptions. 

Treasury Rates Remain Stubbornly High 

The 10-year Treasury yield fell as low as 4.4% in late June following the U.S.-Iran memorandum of understanding. Since then, stronger-than-expected personal consumption expenditures inflation, renewed conflict and rising energy prices have pushed the yield approximately 20 to 30 basis points higher. 

The continued volatility has reinforced the challenges facing CRE investors and lenders. With rates remaining elevated, financing costs are limiting refinancing options, keeping buyers and sellers apart and discouraging owners from bringing assets to market. 

CRE Returns to the Top of Investor Preferences 

Despite the uncertain macroeconomic backdrop, CRE returned to the top of SitusAMC’s quarterly investor preference survey in the second quarter, ranking ahead of stocks, bonds and cash. The rating was well above CRE’s long-term average and returned to the stronger levels recorded during 2025. 

Preference for stocks also increased, while cash and bonds declined. Investors appear to be placing renewed value on CRE’s tangible-asset characteristics during a period of heightened economic and political volatility. 

A “hold” strategy remains dominant because of uncertainty and high rates. However, buy and sell recommendations moved closer together for the first time in several years. 

“Both buy and sell are starting to coincide,” Muoio said. “The question is whether this is a hopeful sign that buyers and sellers are closing in on their expectations, which could be a precursor to more transaction activity.” 

Capital Remains Available but Highly Selective 

Equity and debt capital conditions changed little during the quarter. Equity remains less available and more disciplined than its historical norm, with capital concentrated in high-quality assets, stronger sponsors and growth markets. 

Debt underwriting standards remain historically tight, although availability is roughly in line with its long-term average. Considerable debt capital remains on the sidelines, but lenders continue to evaluate opportunities based on asset-specific risks, sponsorship and market quality. 

The result is a market in which financing is obtainable for favored assets, but borrowers face greater scrutiny and fewer options for properties with uncertain cash flows, weak locations or near-term leasing risk. 

Transaction Volume Rebounds but Remains Sluggish 

CRE transaction activity increased 33% in May to $42 billion following a weak April, according to MSCI Real Assets. Yet the increase did not represent a meaningful breakout. 

May’s total matched the average monthly transaction volume recorded since July 2022, shortly after the Federal Reserve began its aggressive rate-hiking cycle. Deal activity has therefore remained stuck near the same subdued level for approximately four years. 

Cap rates similarly showed little movement. Retail and industrial cap rates were unchanged in the second quarter and stood 30 and 20 basis points above their respective long-term averages. Office cap rates increased 10 basis points and remained 80 basis points above their historical average. Multifamily cap rates also rose 10 basis points, their first quarterly increase since the fourth quarter of 2024, bringing them 20 basis points above the long-term average. 

Commercial property prices were somewhat more positive. Office and retail were the only sectors to record monthly increases in the latest MSCI Real Assets data, rising 0.6% and 0.3%, respectively. The office Commercial Property Price Index has moved steadily higher and is now clearly above its recent bottom. 

Distress Measures Send Mixed Signals 

Overall CMBS delinquencies declined 20 basis points during the quarter to 7.4%, approximately 20 basis points above the eight-year average. Hotels drove much of the improvement, with delinquencies falling 80 basis points. Industrial was the only other sector to record a decline. 

Special servicing trends were less encouraging. The overall CMBS special servicing rate increased 30 basis points during the latest month, reaching its second-highest level since SitusAMC began tracking the data in January 2019. 

Apartment special servicing declined 30 basis points during the quarter but remained near a five-year high. Industrial increased 10 basis points, reaching its highest level since June 2020. 

Property-Type Preferences Become More Balanced 

Investors’ views of the major property sectors changed substantially during the second quarter. In the first quarter, apartments accounted for 60% of property-type preference, while industrial and office each stood at 16% and retail ranked slightly lower. 

By the second quarter, preferences were distributed much more evenly. The shift marks a significant change from a year earlier, when apartments represented nearly half of preferences, industrial accounted for approximately 35%, and office and retail each stood near 9%. 

The more balanced results suggest investors may be finding opportunities across a wider range of sectors, including office, which spent several quarters and years near the bottom of the survey. 

Combined with the convergence of buy and sell recommendations, the shift could be an early indication that the market is beginning to emerge from its prolonged slowdown. 

Apartment Fundamentals Improving, AI Boosts Office 

The apartment market continues to work through excess supply, but SitusAMC’s latest forecast anticipates a steep decline in vacancy beginning in 2027. 

Completions peaked at a record level in 2024 and are projected to fall to a 15-year low in 2027. As new deliveries decline and absorption gradually strengthens, the national apartment vacancy rate is expected to return to its pre-pandemic level of approximately 4.6% by 2029. Rent growth should accelerate alongside that improvement and exceed pre-pandemic levels in 2029. 

Artificial intelligence presents a longer-term risk to office demand if it reduces employment in office-using industries. In the near term, however, AI companies are strengthening leasing in San Francisco, Silicon Valley, New York, Boston and Seattle. 

AI-related firms accounted for 58% of first-quarter office leasing in San Francisco, supported by Anthropic’s lease of more than 400,000 square feet. Manhattan office leasing is also on pace for its strongest year since 2000, with AI demand helping reshape submarkets including SoHo and Hudson Square. 

Nevertheless, broader office fundamentals remain challenged. Vacancies are expected to reach record highs in 2026 as negative absorption persists. Vacancy should gradually decline as new construction slows and absorption turns modestly positive, but SitusAMC expects it to remain near 20% through 2030. Rent growth is forecast to improve but remain below pre-pandemic levels. 

Consumer Debt Adds Risk to the Retail Outlook 

Buy now, pay later issuance reached a record $156.7 billion in 2025, with growth across all major loan categories. Pay-in-four loans, which typically carry a 0% annual percentage rate when repaid on schedule, increased approximately 20% year over year. 

Growth was considerably stronger in interest-bearing products. Longer-term installment issuance rose approximately 38%, while shorter-term installment loans nearly doubled. 

“This can be a source of what is known as shadow debt, because it does not necessarily appear in traditional consumer debt data,” Rasmussen said. “Credit bureaus are still inconsistent in how these loans are reported, which makes it harder to assess the full picture of household leverage.” 

Retail property fundamentals remain relatively stable. Vacancy is expected to hold at slightly below 10.5% in 2026, where it has remained since 2021. With new supply muted and absorption improving, vacancy is forecast to decline to approximately 9.5% by 2030, its lowest level since before the Global Financial Crisis. Rent growth is expected to strengthen as availability tightens. 

Industrial Vacancy Nears a Turning Point 

Industrial vacancy is projected to increase modestly in 2026 but remain low relative to pre-pandemic levels. It should then decline gradually through 2030 as new supply remains constrained and absorption strengthens. 

Rent growth is expected to gain momentum beginning in 2027, returning toward more normalized levels following the extraordinary increases recorded in 2021 and 2022. 

View the ValTrends Look Ahead webinar presentation here. Our 24-page ValTrends report will come out at the end of the quarter. Subscribe to be notified as soon as the report is available, and we’ll send a link to download it for free. For more information on SitusAMC Insight’s research, analytical tools or data products, visit our website.