Market Report

As we wrap up 2025, the U.S. and global economies continue to navigate a complex landscape shaped by trade policies, immigration shifts, and geopolitical tensions. In our latest Q4 Economic Report, we dive into the trends defining GDP growth, employment, monetary policy, and the broader global picture. Here's a concise summary of the highlights—perfect for staying informed on how these factors could impact commercial real estate and business decisions.

GDP Growth: A Robust Finish Despite Challenges

The U.S. economy showed remarkable strength in Q4 2025, with the Atlanta Fed's GDPNow model projecting a 5.4% growth rate—the highest since early 2018. This surge was driven by strong consumer spending, a narrowing trade deficit (down 39% to $29.4 billion in October, the lowest since 2009), and positive revisions in personal consumption expenditures (up to 3% in November). Business spending also held steady, with non-defense capital goods orders rising 0.7%.

Productivity jumped 4.9% in Q3, outpacing wage growth and keeping inflation in check. However, analysts note that much of this growth stems from reduced imports rather than pure domestic expansion. Looking ahead, Deloitte warns that tariffs could push core inflation to 3% in 2026, lingering above the Fed's 2% target until 2028 as costs gradually pass to consumers.

Employment: Cooling but Stable Amid Policy Shifts

Hiring slowed significantly in 2025, with only 584,000 jobs added for the year—down from over 2 million annually in prior years. December saw just 50,000 new positions, and revisions lowered October and November figures to 173,000 and 56,000, respectively. The monthly average of 49,000 jobs was the lowest since 2003 (excluding recession years).

Key factors include deportations and immigration enforcement, reducing net immigration from 2.27 million in 2024 to 410,000 in 2025, which reduced the worker supply. This kept the unemployment rate steady at 4.4%. Sectors like health care (713,000 jobs added, averaging 34,000 monthly) and leisure/hospitality (188,000 jobs) led growth, while manufacturing, retail (down 25,000 in December), and warehousing declined.

Fitch Ratings' Olu Sonola cautions that cyclical sectors aren't signaling comfort, and younger workers face higher unemployment due to AI competition and hiring caution tied to tariff uncertainties.

Monetary Policy: A New Era on the Horizon

The Federal Reserve faces a leadership shakeup as President Trump nominates Kevin Warsh to replace Jerome Powell, whose term ends in May. Warsh, a former Fed governor and inflation hawk, is praised for pragmatism but criticized for past attacks on the Fed. Market reactions are mixed; supporters like Canada's Prime Minister Mark Carney call it a "fantastic choice," while others worry about internal tensions.

This comes amid a Supreme Court ruling on presidential removal of Fed governors (e.g., Lisa Cook's case), testing the bank's independence. Warsh's appointment signals potential shifts in asset holdings, policy frameworks, and executive relations—echoing Paul Volcker's inflation-fighting era.

Global Economy: Resilient but Cautious Growth

The IMF projects global growth at 3.3% for 2026 and 3.2% for 2027, slightly up from 2025 estimates, thanks to easing trade tensions. U.S. growth accelerated to 4.3% in Q3, boosted by tech investments, while China slowed to 2.4% due to weak housing but strong exports. Europe varied: France grew 2.2% on aerospace, Germany stagnated, and Japan contracted 2.3%.

Trade volume is expected to dip to 2.6% in 2026 before rebounding, with policy uncertainty lower but still elevated. Oil prices may fall 7% due to oversupply, and bilateral deals add complexity. Overall, the world economy remains adaptable, with tech-driven exports providing a buffer.In summary, Q4 2025 paints a picture of U.S. resilience amid policy headwinds, with global stability hinging on trade resolutions. For commercial real estate stakeholders, these trends underscore opportunities in health care and tech sectors, while cautioning on inflation and labor shortages.

If you'd like a full copy of the Q4 2025 Economic Report, feel free to contact me directly at Lee & Associates.

Ron Mgrublian, Lee & Associates Commercial Real Estate Services

As we wrap up 2025, the San Gabriel Valley (SGV) industrial submarket is demonstrating clear momentum toward recovery after a couple of challenging years marked by rising vacancies and negative absorption. Here at Lee & Associates, we're excited to share the latest insights from our Q4 report, highlighting positive shifts that could signal stronger days ahead for tenants, landlords, and investors alike.

This overview paints an optimistic picture: vacancy rates have dipped to 5.2% from 6.2% at the end of 2024, bolstered by over 2 million square feet of positive net absorption throughout the year. Leasing activity has remained robust, with more than 9.7 million square feet transacted across 638 deals—indicating that tenants are confidently re-entering the market even as availability sits at 6.8%. Construction activity is modest at just 529,985 square feet under way, with new deliveries slowing down significantly. Meanwhile, direct average triple-net rents have moderated to $15.48 per square foot, creating a more competitive and balanced environment for all parties.

Key Market Indicators

To give you a snapshot of the quarter-by-quarter trends, here's a breakdown of the core metrics for 2025 compared to Q4 2024:

These figures underscore the submarket's stabilization. While Q4 saw a slight dip in net absorption, the full-year positive trend is a welcome reversal from 2024's challenges. Rents have adjusted downward, which may attract more cost-conscious tenants, and cap rates are holding steady around 5%, reflecting investor confidence.

Net Absorption, Deliveries, and Vacancy Trends

The SGV's recovery is perhaps best illustrated by its absorption and vacancy patterns. After negative absorption in recent years, 2025 brought a surge of positive activity, reducing vacancy by a full percentage point. Limited new deliveries have helped keep supply in check, preventing further upward pressure on vacancy rates. If this trajectory continues, we could see even tighter conditions in 2026, potentially driving rents back up.Construction remains subdued, with only about 530,000 square feet in the pipeline—a far cry from the more aggressive development seen in prior cycles. This cautious approach from developers is likely a response to economic uncertainties, but it positions the market well for organic demand growth.

Notable Sale Transactions

Investment activity picked up steam in Q4, with several high-profile deals showcasing strong interest in Class A and B properties. Here's a look at the top sales by square footage:

*Part of a portfolio sale.These transactions highlight the appeal of well-located industrial assets in Industry and surrounding areas, with prices per square foot climbing north of $240 in some cases.

Top Lease Transactions

Leasing was equally dynamic, with eCommerce, advertising, and freight sectors leading the charge. Key deals included:

These leases reflect diverse industry demand, from online retail to logistics, and underscore SGV's strategic position in Southern California's supply chain ecosystem.

Looking Ahead

As we head into 2026, the San Gabriel Valley industrial market appears poised for continued improvement. With vacancy trending downward and leasing activity holding strong, opportunities abound for businesses seeking space in this vital region. If you're navigating the market—whether as a tenant, owner, or investor—Lee & Associates is here to provide expert guidance tailored to your needs.

For more details or to discuss how these trends impact your real estate strategy, feel free to reach out to me, Ron Mgrublian, at Lee & Associates.

To receive the full Q4 2025 San Gabriel Valley Industrial Market Report (including detailed charts, net absorption trends, and additional insights), contact me directly.

Positive Tenant Demand Ends 11-Quarter Contraction 

Orange County’s industrial market showed clear signs of stabilization in the fourth quarter of 2025, posting its first positive net absorption in nearly three years and officially ending the county’s longest contraction on record. 

Key Highlights – Q4 2025 

• Net Absorption: +316,406 SF (first positive quarter since Q4 2022)
• Full-Year Net Absorption: –1.8 million SF
• Vacancy Rate: 6.30% (up from 5.20% one year ago, but still below the national average of 7.6%)
• Average NNN Asking Rate: $18.36 PSF
• Average Sale Price: $318 PSF
• Cap Rate: 5.88%
• Space Under Construction: 1.59 million SF
• Total Inventory: 304.2 million SF

After 11 consecutive quarters of negative absorption totaling 9.3 million SF (3.4% of total inventory), positive tenant demand finally returned in Q4. While vacancy has risen from a record-low 1.8% to 6.3%, Orange County remains one of the nation’s strongest and most sought-after industrial markets thanks to its proximity to the Ports of Los Angeles and Long Beach and dense Southern California consumer base.

 Market Indicators Trend (2025) 

 Notable Transactions Q4 2025

Top Sales 

• 2164 N. Batavia Street, Orange – 249,431 SF sold for $69.6M ($279 PSF) – Class A
• 17352 Armstrong Avenue, Irvine – 123,748 SF sold for $17M ($137 PSF) – Class C
• 2601 S. Garnsey Street, Santa Ana – 122,407 SF sold for $31.8M ($260 PSF) – Class C

 Top Leases 

• 2164 N. Batavia Street, Orange – 246,732 SF to Paper Mart (Packaging Wholesale)
• 17352 Armstrong Avenue, Irvine – 123,748 SF to Fletcher Jones (Retailer)
• 15345 Barranca Parkway, Irvine – 84,580 SF to Undisclosed Tenant

 What It Means for Occupiers & Investors 

• Occupiers: Rental rates have moderated slightly, giving tenants more negotiating power than they had in 2021–2023. Availability is up, especially in Class B and C product.
• Investors: Sale prices are down and cap rates have expanded ~150 bps year-over-year, creating more attractive entry points in a market that historically delivers strong long-term performance.
• Developers: The pipeline has shrunk 22% from Q3, signaling that new supply is finally tapering as demand stabilizes.

 Outlook 

The return to positive absorption in Q4 2025 is a major inflection point. While full recovery will take several quarters, Orange County’s strategic location, limited new supply, and enduring tenant demand position the market for gradual improvement through 2026.

For the full Q4 2025 Orange County Industrial Market Report contact me directly.

As we wrap up 2025 and look ahead to 2026, the Southern California industrial market continues to demonstrate resilience amid evolving economic conditions. At Lee & Associates, we're excited to share our latest quarterly report, which dives deep into macroeconomic drivers, port activity, and submarket fundamentals across South Bay, Midcounties, Central LA, and the Inland Empire. This blog post provides a high-level summary of the key findings—think of it as your quick guide to the trends shaping industrial real estate in SoCal. For the full details, including charts, data tables, and in-depth analysis, reach out to me directly. I'd be happy to send you the complete PDF report.

Macroeconomic Drivers Fueling Industrial Demand

The U.S. economy showed strength in 2025, with real GDP accelerating to a 4.3% annual rate in Q3—the fastest in two years—driven by consumer spending, exports, and government outlays. Employment growth slowed, adding just 50,000 jobs in December, keeping the unemployment rate steady at 4.4%. Retail and e-commerce sales remained robust, with total retail up 3.3% year-over-year in November and e-commerce growing 5.1%, accounting for 16.4% of retail activity.Key warehouse occupiers in Q4 included:

• Third-Party Logistics (3PL) Providers: Dominating 35% of leasing, as retailers outsource for flexibility amid trade risks.
• Advanced Manufacturing: Boosted by nearshoring in semiconductors and EVs.
• E-commerce & Omnichannel Retailers: Shifting to smaller urban warehouses for faster deliveries.
• Tech Companies: Leasing big for AI-driven data centers.
• Automotive, Construction, and Food & Beverage: Showing renewed activity with improving housing starts and modern facilities.

Looking to 2026, GDP is projected to grow 2.7%, supported by fiscal stimulus and easing rates, though inflation lingers above 2% and trade policies remain uncertain.

LA & Long Beach Ports: Still the Nation's Trade Powerhouses

SoCal ports handled elevated container volumes in 2025, with LA and Long Beach leading despite year-over-year declines in Q4. LA's total TEUs dropped 14.11% quarterly, while Long Beach saw an 8.82% dip. Inbound loads remained strong, but empties and exports contributed to the slowdown. West Coast gateways continue to anchor U.S. throughput, driving industrial demand in nearby submarkets.

Submarket Spotlights: Trends, KPIs, and Deals

South Bay: Gateway Stability with Modest Easing

Vacancy ticked up to 6.1% (from 6.0% in Q3), with positive net absorption of 90,662 SF offsetting 60,558 SF in deliveries. Under construction: 324,921 SF. Asking rents stabilized at $1.52 NNN, up quarterly but down annually. Sales volume surged to $370.5M, driven by institutional deals.

Top Leases:

• Vie Logistics: 389,097 SF in Rancho Dominguez (Third-Party Logistics)
• Morrison Express: 219,575 SF in Compton (Freight Forwarding)

Top Sales:

• Clarion Partners: 1,008,837 SF portfolio in Compton/LA for $412M
• Morgan Stanley: 143,060 SF in LA for $211.4M

Trends: Availability rose to 6.1%, signaling a balanced market; investment focused on quality assets.

Midcounties: Tight Corridor Loosening Slightly

Vacancy rose to 6.8% (from 6.3%), with 191,874 SF net absorption and 493,874 SF delivered. Under construction: 28,320 SF. Rents held at $1.33 NNN, up quarterly but 11% below last year. Sales cooled to $81M across eight deals.

Top Leases:

• FedEx: 516,124 SF in Downey (Parcel Delivery)
• Peak Logistics: 117,774 SF in Santa Fe Springs (Third-Party Logistics)

Top Sales:

• 3 Industrial: 303,754 SF portfolio in La Mirada for $55M
• World Trade Printing: 89,873 SF in La Mirada for $23.4M

Trends: Direct space drove vacancy uptick; investors remain selective with cap rates at 4.7%.

Central LA: Dense Corridor Showing Signs of Balance

Vacancy dipped to 5.6% (from 6.0%), thanks to strong 1,287,891 SF net absorption and no new deliveries. Under construction: 486,333 SF. Rents softened to $1.40 NNN, flat year-over-year. Sales volume rose on larger deals, with cap rates compressing to 5.4%.

Top Leases:

• Amazon: 615,000 SF in Commerce (E-Commerce)
• Sport Dimension: 132,642 SF in South Gate (Sporting Goods)

Top Sales:

• Hines REIT: 717,065 SF in LA for $287M
• Atlas Capital: 648,000 SF in LA for $241.5M

Trends: Absorption stabilized vacancy; market bifurcated toward infill quality.

Inland Empire: Big-Box Hub Normalizing

Vacancy climbed to 8.1% (from 7.6%), but net absorption rebounded to 2,186,058 SF amid 1,065,546 SF deliveries. Under construction: 6,791,711 SF—the highest pipeline. Rents stabilized at $0.99 NNN, down annually. Sales moderated to lower volumes and $208/SF pricing.

Top Leases:

• Hankook Tire: 754,392 SF in Fontana (Automotive)
• RJW Logistics: 656,695 SF in Perris (Third-Party Logistics)

Top Sales:

• Rexford Industrial: 1,101,400 SF in Fontana for $365M (Sale-Leaseback)
• Costco: 1,613,290 SF in Ontario for $345M (Owner-User)

Trends: Supply growth outpaced demand, but positive absorption signals steady logistics interest.

Final Thoughts and Next Steps

Overall, the SoCal industrial market in Q4 2025 reflected a transition toward balance: softening rents, rising vacancies in some areas, but resilient demand from logistics, e-commerce, and manufacturing. Ports remain a key driver, and with 2026's projected growth, opportunities abound for savvy investors and occupiers.

This is just a teaser— the full report includes detailed charts on rent trends, port volumes, and more. If you'd like the complete PDF or have questions about how these insights apply to your industrial needs in Long Beach or beyond, don't hesitate to reach out. Contact me, Ron Mgrublian, at Lee & Associates: rmgrublian@lee-associates.com. Let's connect and discuss your next move!

The industrial real estate sector is shifting from large-scale warehouses to small-bay industrial properties (2,000–10,000 sq ft), which are emerging as a resilient, high-performing asset class driven by structural demand and favorable fundamentals.

Key Market Fundamentals

• Vacancy: Small-bay vacancy at 4.2% vs. 7.4% for large-scale industrial.
• Rent Growth: Small-bay rents up >40% since 2020, far outpacing broader industrial growth.
• Tenant Stability: Shorter leases, high retention, and "sticky" tenants who expand/contract within parks.
• Operational Advantages: Lower maintenance, scalable portfolios, and diversification reduce risk.

Demand Drivers

• Reshoring & Local Logistics: Proximity to customers supports service trades, contractors, and regional distributors.
• Small Businesses: Over 36 million U.S. small businesses (nearly 50% of private-sector jobs) fuel consistent demand.
• Last-Mile & Urban Infill: Rising fulfillment costs push tenants toward efficient, right-sized spaces.

Hotspot Markets (U.S. & Canada)

Investment Momentum

• Q2 2025 Sales: Properties <150K sq ft = 62% of industrial transaction volume ($5.89B in $5–25M range).
• Pricing: Small-bay sale prices up 55% since Q3 2020 (avg. $104/psf in Eastern PA/NJ).
• Investor Profile: Strong local/regional buyer activity; off-market deals dominate to avoid bidding wars.
• Institutional Interest: Growing but still a local landlord’s game.

Strategic Outlook

• Scarcity is Structural: Zoning, land constraints, and high construction costs limit new supply.
• Risk Mitigation: Diversified tenant base and short leases hedge against volatility.
• Caution: Rising rents causing tenant pushback in overheated markets — credit diligence critical.

Conclusion

Small-bay industrial is no longer a niche — it’s the connective tissue of modern industrial real estate. With systemic supply constraints, secular demand trends, and superior risk-adjusted returns, it offers investors agility, durability, and alpha in an evolving cycle.

“The next decade won’t be about size. It will be about agility, adaptability, and execution.”

Market Summary

• Demand Softening: Industrial demand continued to ease in Q3, with negative net absorption of -850,291 SF — the largest quarterly loss in 2025 and the 11th consecutive quarter of tenant contraction.
• Vacancy Surge: Countywide vacancy rose to 6.6%, the highest since the Great Recession (up from 1.8% over the past 11 quarters).
• Lease Rates Declining: Average NNN asking rate fell to $18.12 PSF (down from $19.20 PSF in Q3 2024).
• Tenant Concessions at Peak: Landlords offering maximum incentives to attract tenants.
• Bright Spot: Increased activity in 100,000–200,000 SF distribution & manufacturing spaces.

Key Market Indicators (Q3 2025 vs Prior Quarters)

Top Lease Transactions (by SF)

Top Sale Transactions (by SF)

Outlook

• Rising vacancy and falling rents signal a tenant-favorable market.
• Sales activity remains resilient, with average sale prices up 10% YoY despite higher cap rates.
• Construction pipeline cooling (down ~24% from Q2), potentially stabilizing supply in 2026.

Source: Lee & Associates Research, CoStar, U.S. Bureau of Labor Statistics | © 2025

Q3 2025 San Gabriel Valley (SGV), CA Industrial Market Summary

Market Recovery Signs

• Vacancy Rate: Down to 5.3% (from 6.4% in Q3 2024), with YTD improvement to 5.4% from 6.2% in 2024.
• Net Absorption: Strong rebound with +1.56M SF YTD; 12-month total at +2.12M SF (vs. -1.78M SF in Q3 2024).
• Leasing Activity: Robust at ~9M SF across 539 deals, indicating tenant re-entry despite elevated availability (~6.4%).

Rents & Pricing Trends

• Avg NNN Asking Rent: $1.29 PSF, down from $1.49 PSF (Q3 2024) — reflecting landlord competition.
• Sale Price PSF: $240.24, down from $285.03 in Q2 2025.
• Cap Rate: Compressed to 4.8% (from 6.1% in Q3 2024), signaling rising investor confidence.

Supply & Development

• Under Construction: 617K SF — limited pipeline, new deliveries slowed significantly.
• Total Inventory: 177.75M SF, stable with minimal additions.

Top Lease Transactions (by SF)

Top Sale Transactions (Portfolio Deal by TA Realty)

Outlook: SGV industrial market is stabilizing with improving fundamentals, strong leasing, and moderating rents. Low construction and positive absorption support a tenant-favorable but recovering environment.

Source: Lee & Associates Research, Q3 2025

Overview

The "Industrial Market Insights Q3 2025" report by Lee & Associates analyzes the Southern California industrial real estate market, focusing on the South Bay, Midcounties, Central, and Inland Empire submarkets. It highlights macroeconomic drivers, trade trends, port activity, and submarket-specific fundamentals like vacancy rates, net absorption, rents, construction, and top transactions. Overall, the market shows softening conditions with rising vacancies, declining rents in some areas, and stabilizing investor activity amid economic moderation. Ports of Los Angeles (LA) and Long Beach (LB) remain dominant U.S. trade gateways, though competition from East/Gulf Coast ports intensifies.

Macroeconomic Drivers

• GDP: Real GDP grew 3.8% annualized in Q2 2025, rebounding from a 0.6% Q1 decline, driven by consumer spending and reduced imports. Q3 growth is projected at ~3%.
• Employment: Unemployment rose to 4.3% in August, with only 22,000 jobs added (downward revisions to prior months). Wage growth of 3.7% year-over-year supports consumer spending.
• Retail & E-Commerce Sales: E-commerce sales hit $304.2B in Q2 (up 1.4% QoQ, 5.3% YoY), representing 16.3% of total retail sales ($1.87T, up 0.4% QoQ, 3.9% YoY).
• Trade Partners: Mexico leads U.S. trade at 21%, followed by Canada (17%) and China (10%). Top 15 partners account for 74.2% of activity.
• Year-End Outlook: GDP growth ~2.6% annualized in Q4, with stable consumer spending despite labor cooling and a government shutdown. Moderate expansion and cooling inflation bode well for 2026 commercial real estate.

Port Activity

LA and LB ports handled ~41% of U.S. imports by TEU market share. West Coast ports lead in throughput, but East/Gulf ports (e.g., NY/NJ, Houston) are gaining.

Submarket Summaries

South Bay

• Fundamentals: Vacancy rose to 6.9% (from 6.3% in Q2). Net absorption negative at (757,229) SF. Deliveries: 429,112 SF. Under construction: 244,786 SF.
• Rents & Sales: Average NNN rent fell to $1.48/SF (down 8.5% YoY). Building sales averaged $291/SF (cap rate 6.4%).
• Market Trends: Softening conditions with higher availability (9.5%); tenant-favorable market. Investment slowed (13 deals, $75.4M volume).
• Top Leases (all new): 19801 S Santa Fe Ave (356,642 SF, Confidential); 901 E 233rd St (221,050 SF, Custom Goods); 20846 Normandie Ave (203,877 SF, Hadrian Inc).
• Top Sales: 3700-3730 Redondo Beach Blvd (99,377 SF, $35.5M, Investment); 2959 E Victoria St (54,500 SF, $23M, Owner-User).

Midcounties

• Fundamentals: Vacancy fell to 7.3% (from 8.0% in Q2). Net absorption positive at 678,807 SF. Deliveries: 0 SF. Under construction: 493,874 SF.
• Rents & Sales: Average NNN rent at $1.30/SF (down 16% YoY). Building sales averaged $259/SF (cap rate ~5.0%).
• Market Trends: Stabilizing with lower direct vacancy; availability at 9.8%. Investment slowed (17 deals, $148.2M volume).
• Top Leases: 15614-15700 Shoemaker Ave (521,091 SF, Breakthru Beverage CA, New); 8201 Sorensen Ave (234,330 SF, Rove Concepts, Renewal).
• Top Sales: 6259 Descanso Ave (54,000 SF, $17.4M, Owner-User); 14390 Marquardt Ave (31,308 SF, $17M, Owner-User).

Central

• Fundamentals: Vacancy rose to 7.1% (from 6.8% in Q2). Net absorption negative at (465,078) SF. Deliveries: 157,715 SF. Under construction: 749,742 SF.
• Rents & Sales: Average NNN rent steady at $1.41/SF. Building sales averaged $295/SF.
• Market Trends: Slight softening; availability at 8.5%, occupancy 92.9%. Steady sales (25 deals, $190.4M volume).
• Top Leases: 8500 Rex Rd (335,600 SF, Million Dollar Baby Classic, New); 4885 E 52nd Pl (210,347 SF, Uniuni, New).
• Top Sales: 4400 Pacific Blvd (253,200 SF, $48.8M, Investment); 7400 Bandini Blvd (94,937 SF, $38.5M, Owner-User).

Inland Empire

• Fundamentals: Vacancy rose to 8.9% (from 8.1% in Q2). Net absorption negative at (746,596) SF. Deliveries: 5,299,580 SF. Under construction: 6,036,579 SF.
• Rents & Sales: Average NNN rent up to $1.00/SF (from $0.98 in Q2, down 12% YoY). Building sales averaged $252/SF (cap rate 5.9%).
• Market Trends: Balancing with high availability (12.3%); occupancy ~91%. Investment surged (55 deals, $777.2M volume).
• Top Leases: 5690 Industrial Pky (844,311 SF, iDC Logistics, New); 13052 Jurupa Ave (827,578 SF, Elogistek, New).
• Top Sales: 11991 Landon Dr (765,456 SF, $208.76M, Investment); 22491 Harley Knox Blvd (348,375 SF, $90.6M, Investment).

The report emphasizes logistics and manufacturing as key industries in transactions, with a tenant-favorable shift prioritizing occupancy over rent growth. Data sourced from AIR CRE, CoStar, and internal databases.

The report from Lee & Associates discusses the implications of the Federal Reserve's "higher for longer" interest rate policy on commercial real estate (CRE) investments in 2025. Following a modest 0.25% rate cut in September 2024, bringing the benchmark to 4.00%-4.25%, the Fed signals cautious easing amid persistent inflation (core at 3.1%, headline at 2.9%) and internal debates on neutral rates (ranging from 2.5% to 4%). This environment shifts CRE from momentum-driven to performance-based strategies, with elevated borrowing costs (often >6%) repricing risk, portfolios, and values. Key themes include structural rate pressures, refinancing crises, sector divergences, cap rate tensions, and adaptive investment approaches.

Key Challenges

• Persistent Rates and Inflation: Sticky inflation in housing and services keeps rates high, with 10-year Treasuries near 4%. Lenders demand stronger sponsorship, conservative leverage, and NOI stability, leading to tighter spreads and shorter terms. The recent cut offers short-term relief but minimal impact on long-term capital.
• Refinancing Risk: $1.5 trillion in CRE loans mature by end-2025, prompting short-term extensions. Properties from peak eras face shortfalls, especially in office and multifamily sectors. Markets like Dallas, Atlanta, and Phoenix see stretched debt-service ratios, forcing sales, payoffs, or defaults.

Sector-Specific Impacts

• Office: Undergoing restructuring with vacancies >20% in cities like Denver, Chicago, and San Francisco (especially Class B/C). Flight-to-quality persists, but even premium assets face tenant risks. Conversions to lab/residential/flex space rise, with trades at 30-70% discounts from peaks.
• Multifamily: Favored but divergent—urban cores (e.g., New York, Boston, LA) stabilize with low vacancies; Sun Belt oversupply (e.g., Austin, Raleigh) leads to concessions and 10%+ vacancies. High costs, rent caps (e.g., Washington's ~9.7% in 2026), and extended lease-ups complicate deals. Private buyers target below-replacement-value assets.
• Industrial: Remains strong but cooled, with national vacancy at 7.4%. Big-box absorption slows in Phoenix and Chicago, but infill/last-mile/flex/cold storage thrives in constrained markets due to tenant retention and limited supply.
• Retail: Resilient with 4.3% national vacancy. Grocery-anchored and experiential assets outperform in Miami, Charlotte, and San Diego. Bifurcation exists: outdated centers in tertiary markets soften, while cash-flowing properties attract private capital.

Cap Rates and Valuation

Cap rates appear stable nationally but mask a buyer-seller standoff—sellers cling to peak pricing, buyers factor in risks. Tension persists into late 2025, especially in multifamily and industrial, with repricing often subtle rather than overt yield shifts.

Investment Strategies for the New Normal

Investors shift from Fed-pivot anticipation to disciplined execution:

• Prioritize In-Place Cash Flow: Stabilized income hedges against costs and dislocations.
• Operational Execution: Focus on leasing, expense control, and targeted repositioning over major capex.
• Underwrite Exits Upfront: Deals must stand alone, assuming full-cycle ownership.
• Creative Financing: Use seller carrybacks, preferred equity, and hybrids to bridge gaps.
• Value-Add Focus: Target assets with fixable issues (e.g., leasing friction) without overcapitalizing.

Conclusion

The report emphasizes CRE's maturation in a rate-sensitive era, rewarding pragmatism and local insight. The Fed's cut boosts confidence modestly, but elevated rates are the baseline—opportunities lie in fundamentals, not speculation. Insights from Lee professionals highlight fragmentation and selectivity.

• Demand for industrial space declined for the tenth consecutive quarter in Q2 2025.
• Vacancy rate increased to 6.1%, up from a record low of 1.8% in late 2022.
• Higher vacancy rates have led to improved market conditions for tenants, with rental rates dropping over 10% from their recent peak.
• Reduced demand is primarily driven by concerns over tariff impacts, contributing to decreased cargo volumes at the Los Angeles port complex.
• Year-over-year container traffic in May 2025 fell by 5% at the Port of Los Angeles and by 8.2% at the Port of Long Beach.
• Rising vacancies are fostering a more balanced industrial market.
• The overall vacancy rate reached 6.1% at the end of June 2025, the highest since 2012.

South Bay Submarket Q2 2025 Overview Summary

• Vacancy/Availability: Total vacancy hit 6.4%, the highest since early 2023, with a 70-basis-point quarterly rise; available space reached 19.4 million square feet, up 2.5 million SF since Q4 2024, driven by returning leased properties and slow lease-ups; sublet vacancy rose to 1.0%, hinting at tenant downsizing; absorbing 4.8 million SF is needed to reach a 4% vacancy rate, excluding new deliveries.
• Rental Rates: Asking rents softened to $1.54 NNN per square foot from $1.61 in Q1 and a $1.69 peak in Q2 2024, marking two consecutive quarterly declines since the pandemic recovery; direct rents dropped more than sublet rents, reflecting landlord pressure from rising vacancies and slow leasing; despite high historical levels, tenants are gaining negotiation leverage.
• Construction: Only one building (504,000 SF) was delivered, with the pipeline shrinking to 742,000 SF, down 60% from 1.9 million SF a year ago, due to caution over vacancies, slow leasing, and softening rents; graded sites are on standby awaiting tenants or better conditions; no preleased projects suggest rising vacancy risks if leasing doesn’t improve.
• Leasing Activity/Absorption: Negative net absorption of -1.15 million SF marked a downturn from 544,000 SF last quarter, the third negative quarter in four, indicating tenant contraction; leasing activity fell to 1.12 million SF leased and 84 deals, below the 105-deal historical average, reflecting occupier caution, especially for larger spaces.
• Sales Activity/Investment Trends: Sales totaled 19 transactions at $93.5 million, up from 16 in Q1 but far below $375 million in Q4 2024; the average price per square foot dropped to $211.83, the lowest in over a year, as buyers adjust to vacancies and rents; cautious investor sentiment persists due to delayed Fed rate cuts and tariff uncertainty, though strong fundamentals attract future capital.

The South Bay industrial market faces challenges with rising vacancies, softening rents, and reduced activity, tempered by potential for recovery as market conditions stabilize.

Midcounties, Central, Inland Empire Submarkets also included in report

Key Points:

• Industrial space demand in Orange County declined for the ninth straight quarter in Q1.
• Asking rents dropped nearly 10% during the quarter.
• Net absorption was negative at 626,940 square feet in Q1.
• Previous absorption declines: 5.2 million SF in 2024 and 2.6 million SF in 2023.
• Countywide vacancy rate increased from 1.8% (record low) to 5.8% over two years.
• Business caution, fueled by last year's issues and election-related tariff concerns, continues to limit growth.