Even as economic uncertainty continues to weigh on decision-making, the commercial real estate market is trending toward recovery, according to Integra Realty Resources' (IRR) mid-year CRE report.
“Our mid-year analysis shows that more markets are in recovery than recession for the first time in years – an encouraging shift, though confidence remains uneven,” said Integra CEO Anthony Graziano. “As broader economic uncertainty continues to shape investment decisions, staying disciplined and focused on fundamentals will be the key to navigating a fragmented and fast-moving market.”
Amid the recovery, a clear flight to quality has emerged and continued, with investors and occupiers alike prioritizing high-performing assets that meet modern operational needs, said the report. Underwriting is driven less by broad market momentum and more by long-term resilience and location.
The office market is a prime example of this bifurcation, with demand moving to high-quality, well-located assets. This has led to a widening performance gap between Class A and commodity space in both leasing and investment strategies. In addition, legacy cores continue to face higher vacancy rates as hybrid work and downsizing impact demand, but lifestyle and Sun Belt metros are showing signs of recovery, according to Integra. Meanwhile, new office construction has slowed significantly and most activity is build-to-suit, life sciences and medical office.
Central business district (CBD) Class A office cap rates rose 23 basis points to 8.22%, according to the report. Class A vacancy increased to 21.22% while Class B vacancy decreased to 20.67%. Both Class A and Class B rents increased during the first half of the year, by 1.15% to $33.37 and by 0.84% to $23.69, respectively.
Northern and Midwestern metros like Chicago, Philadelphia and Minneapolis are leading stabilization in the multifamily sector, while Sun Belt markets, including Austin and Phoenix, continue to work through elevated new supply. Oversupplied areas have seen moderating rent spikes, but growth remains strong in infill, high-barrier and affordable markets like Indianapolis, Northern New Jersey, Los Angeles and San Diego.
New multifamily development is slowing as construction and capital costs increase. Urban Class B cap rates increased six bps to 6.27% over the first half of the year, while urban Class A cap rates decreased one bps to 5.68%. Class A and Class B vacancies both increased, to 7.46% and 5.16%, respectively.
Retail continues to outperform expectations, led by mixed-use, grocery-anchored and lifestyle centers. Markets including Austin, Tampa and Orange County are leading rent growth, while older mall formats and urban cores such as Detroit and San Francisco face ongoing headwinds, according to the report. Tenant demand is concentrated in well-located suburban and growth markets where leasing is driven by a mix of national brands and essential services.
Community retail cap rates fell eight bps to 7.17% while neighborhood retail declined 11 bps to 7.15%. Community retail vacancy was down slightly to 10.28% and neighborhood retail vacancy fell to 10.61%. Market rents increased for both categories.
Industrial remains healthy overall, but speculative development is pushing vacancy higher in metros like Dallas-Fort Worth, Indianapolis and Philadelphia. Rent growth is flattening in oversupplied areas but remains positive in land-constrained and infill markets, said the report. New starts are focused on built-to-suit construction and adaptive reuse projects.
Warehouse cap rates increased six bps to 6.48% while flex industrial levels increased three bps to 6.97%.
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