Q2-2025
Executive Summary
SECOND QUARTER 2025
The US, and world economies are at a crossroads. Governments, companies, and consumers, find themselves facing critical decisions in an environment of deep uncertainty. Assertive decision-making is difficult but more necessary than ever as the pace of change accelerates. Technology is pushing boundaries of efficiency and familiar terrains are morphing into new realities. Asset owners, capital providers and labor, are adopting a sharp focus on changing demographics and unfolding consumer needs.
The role and relevance of commercial real estate continues to transform. Examples are data centers driving industrial demand, medical offices absorbing former retail centers and malls are catering to entertainment, medical and educational tenants. Obsolete offices are sitting empty, some being demolished or repurposed and a group of luxury rental apartment owners are choosing to incorporate under a REIT structure to expand capital sources. As consumers struggle to become homeowners, apartments strive to provide amenities to residents, such as gyms, playrooms and community areas, to retain households for longer and justify rising rents. The bar measuring the value proposition offered by commercial real estate assets, to consumers and businesses is higher, and the scrutiny of investors, deeper.
Debt capital sources and costs are also evolving, and a fundamental change is increasingly capturing debt provider’s mindset: high fiscal deficits around the world now appear to matter to fixed income investors more than at any other time over the last twenty years. In the US, fiscal concerns have become critical for commercial real estate, as a focus on fiscal health has impacted the shape of the Treasury yield curve. Most recently, ten-year Treasuries have fluctuated between the mid to high 4’s (percent), with an upper range bias. An expanding budget deficit is an important element that, among others, can keep long dated Treasury yields at levels that are structurally higher than over the last several years. At the short end of the Treasury yield curve, where Federal Reserve decisions have an immediate impact, rates also remain higher. Uncertainty related to the effect that tariffs may have on inflation, trade concerns, and war disruptions, all impact inflation expectations and the Federal Reserve’s position on interest rates. In aggregate, these factors are near-term hurdles to a softening of interest rates, therefore, commercial real estate owners and investors are planning accordingly.
Underscoring changes and challenges in capital markets, Fannie and Freddie Mac have been asked to consider accepting a homebuyer’s cryptocurrency holdings in their underwriting criteria. This opens the door for a similar consideration with regard to commercial investors. William Pulte, Director of the Federal Housing Finance agency, which oversees Fannie and Freddie requested that the Agencies present a proposal for consideration regarding considering Crypto as an asset in households’ balance sheets. Given that Crypto’s volatility is still elevated, there will be a great deal of debate as to how exactly to implement this guidance. Any guidelines adopted in the residential side, are likely to impact commercial asset financing, in particular multifamily.
Despite near term concerns, the big picture for commercial real estate returns is brightening. Total return and valuations are beginning to improve despite remaining headwinds from interest rates and investor’s lack of confidence. According to Trepp, the National Property Index (NCREIF), which tracks thousands of institutionally owned properties valued at close to US$ 1 Trillion, recently posted its first total return increase in more than two years. Institutional properties tend to lead total return in the uptrend. Improvements in total returns (value plus income) were observed across all sectors. Values still declined marginally for office properties, but income produced offset value declines. Based on this index, retail returns
Executive Summary
exceeded all other property types, including residential. This speaks to the strength of consumer spending, which has, until now, continued unabated.
Striving to gain further perspective on current property valuations, we studied the Trepp value weighted National index. This index is down approximately 10% from the 2022 peak. Multifamily properties remain approximately 16% below their peak. Office properties meanwhile are 20% below, but retail is only 3% below their peak as COVID shutdowns prevented this segment of the market from surging when capitalizations rates compressed (in 2022) following a decline in US treasury yields. Industrial properties also have fared well remaining close to their peak valuation due, in part, to data center demand. Overall, both the equal weighted and value weighted composites are showing signs of recovery.
Westchester Multifamily – Holding strong despite large new unit deliveries
Structural shortages in the residential housing market are impacting commercial real estate across the Country. In Westchester, a chronic housing shortage has become acute. Addressing undersupply appears difficult, given the scarcity of land and complex municipal zoning regulations. Single family scarcity has helped multifamily developers deliver successful projects as absorption rates of rental units has been brisk for several years. As homeownership cost of entry and carrying costs in Westchester become even higher, effective rental rents have had room to increase. This lift has been consistent through several years and has persisted despite of large projects deliveries. Resilience in multifamily rents continues to demonstrate end-user interest in the presence of a persistent supply-demand housing imbalance.
Westchester multifamily vacancy increased sharply in Q2 because of heavy deliveries of new units. However, the pipeline of new construction has now shrunk meaningfully, and we do not expect the heavy weight of new deliveries to be sustained. Pricing continues to be strong as young households and retirees are attracted by the lifestyle offered by the new builds. Over the long term, Westchester continues to be short of housing units and rental apartments are a solution for households.
Westchester Retail – Firm rental trends despite space/retailer turnover
Scarcity of well positioned retail zoned real estate is a fundamental underpinning of Westchester Retail. This has supported pricing despite space turnover. As old concepts go out of favor and new retail ideas are implemented, there is friction created by the process of closing, re-tenanting and renovating.
In the most recent two quarters, Westchester retail has experienced more departures than take-ups, however, pricing has remained strong as limited space availability and underlying economic inflation have given an upper hand to Landlords. Leasing activity remains robust and rental rates are back to the highs of early 2024. While mix (types of retail deals) will affect pricing quarter to quarter, on the ground, fundamentals remain stable and in general, Landlords are meeting price objectives.
Westchester Offices – Undisputable improvement taking hold
Across the Country, and primarily in CBD locations such as Atlanta and NYC, the office market has staged a rebound clearly driven by Class A- full amenity offices. In most markets, the best office real estate has been rebounding but the degree of recovery of tier II and III offices is mixed. In some cities, Tier III (lower-end offices) are experiencing a death spiral and
Executive Summary
occupancy is below 50-60%. Recovery from these levels will be hard and these assets are likely to be sold for a fraction of replacement cost or at land value cost minus demolition cost. This is not yet happening in large numbers but as the debt on these properties matures, refinancing will be unlikely, and liquidation will be the solution for lenders to obtain some principal recovery.
In Westchester, the supply-demand balance for offices has been favorable for the last three quarters. Q2 was particularly strong for this market segment with fairly good leasing activity and strong absorption of office space. Pricing has remained stable over the last four quarters indicating that Landlords have been prioritizing occupancy and seeking to rebuild tenant stability before pushing prices. The overall improvement in fundamentals is benefiting direct as well as sub-let space.
Westchester Industrial
Westchester Industrial assets experienced a decline of 100 basis points in occupancy during the quarter. Supply-demand was unfavorable with tenants departing across warehouse sizes. Availability of industrial space is higher than any time over the last three years, however, rents are holding. Companies are redesigning their supply chains and trade/tariffs related disruptions are being felt even in a market such as Westchester where industrial space has been chronically tight for very long time.
Westchester Investment Sales
The elusive clarity on growth, inflation, and rates, creates a less conducive background for investors (debt or equity) to deploy cash. Compelling opportunities of deep value or distress are the exception. However, those opportunities have been scarce. At the property level, taxes, insurance and customization costs have increased at higher rates than expected, adding to the complexity of underwriting a deal. These factors have negatively impacted the volume of transactions completed during the quarter.
Unemployment Rate in Westchester – It is a tight labor market with unemployment at the lower end of a multiyear range
Services industries, health care and education, are driving growth in employment in Westchester and unemployment rate remains very low. The local economy has proven resilient in the face of high interest rates and tariff fears.
Westchester County Unemployment Statistics - Not Seasonally Adjusted
Sources: COSTAR, Trepp, US. Bureau of Labor Statistics, Unemployment Westchester County (Not Seasonally Adjusted) , NY. Real Estate Employees Data is Seasonally Adjusted. All data retrieved from FRED, Federal Reserve Bank of St. Louis; July 2025
Multifamily Projects: Heavy deliveries impact occupancy
WESTCHESTER, SOUTH OF I- 2 ��
Multifamily deliveries hit a record in Q2 pressuring occupancy downwards, However, rents remain firm. Pricing growth in line with inflation is likely to resume in a market with less competitions from new deliveries.
Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; July 2025
Westchester Office and Retail – Office improves, and Retail occupancy weakens modestly
WESTCHESTER, SOUTH OF I- 2 ��
Office occupancy is experiencing a recovery, that is accelerating and is driven by the top tier office buildings in the region.
Retail rental prices have continued to be resilient despite vacancy increases driven primarily by turnover of big box tenants.
Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; July 2025
Industrial Properties – Weakening driven by trade/tariff uncertainty
SOUTH OF I- 2 ��
Industrial fundamentals are stable; however, trade disruptions due to new tariff regime could bring some friction to local warehouses.
INDUSTRIAL VACANCY PROBABLY IMPACTED BY TARIFF VOLATILITY
Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; July 2025
Investment activity weakens considerably as uncertainty impacts investors
SOUTH OF I- 2 ��
Investment sales volume declined and median pricing fell sharply suggesting “value” deals and properties needing extensive re-hab continue to dominate transactions.
Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; July 2025