Q3-2025
Marziano,
Executive Summary
THIRD QUARTER 2025
We are living in an economy that is increasingly concentrated at either end of the spectrum of outcomes. Some like to call it a “K” shaped economy. The barbell image may be more intuitive. The concept which we observe broadly in the economy as well as in commercial real estate, is that capital and resources continue to flow to the winning sectors. In such environment, it is very difficult to ascertain whether fiscal policy is restrictive or not. Small businesses, entrepreneurs and out-offavor industries, such as some broad swaths of commercial real estate, may be facing difficult access to capital yet, larger companies, especially in the technology sector, have had a banner year in equity and debt issuance, enjoying robust investor appetite and plenty of liquidity. Employment trends have also become extreme as demand in certain areas is intense while in others, employment is fading.
Changes in the structure of the economy, and the tension between the two Federal Reserve mandates (full employment and price stability) render the Fed’s tools limited in efficacy at the present time. The areas of the economy that could benefit most from rate cuts may only experience marginal benefits, as a different type of risk aversion permeates the mindset of businesses and other decision-makers. Investors are now choosing based on their view in the rear mirror, chasing momentum, and hope. Turnaround situations where ingenuity, hard work, and time are required to capture an attractive return have lost followers as the economic environment becomes more uncertain, volatile, and difficult to understand.
Higher long interest rates have materialized after the most recent interest rate cut in September and many observers expect further upside in yields. Globally, governments are facing higher deficits and to fund themselves, they are competing with the private sector for long duration funds. In addition, expected interest rate cuts, targeted to address fading employment, may incite higher near-term inflation. A prolonged period of higher inflation may anchor long-term inflation expectations. The long end of the treasury curve is warning investors that the risk of structurally higher inflation is real.
Tariffs can also exacerbate inflation risk as businesses impacted will try to protect their bottom line by passing additional costs to customers. The idea that tariffs only have a transitory effect on inflation is probably misguided, in our view. As companies try to protect margins they will look across all products and services in their portfolio in their efforts to achieve offsetting price gains, making the impact from tariffs difficult to tract but real and persistent.
In Westchester Commercial Real Estate, our theoretical barbell, of winners and losers, has office properties and some lodging assets, on the losing end. Multifamily apartments and industrial properties are still the consistent winners. Retail properties are mixed, with shopping center and small format, in-town locations, showing strong leasing trends and big-box formats in the weaker end. The larger, difficult to re-develop formats are taking long time to lease, upon tenant departure.
At a national level, concerns about CRE delinquencies are subsiding. The Trepp CMBS (Commercial Mortgage-Backed Securities) delinquency rate decreased in September 2025, falling six basis points to 7.23%. This is the first decline since February 2025. In September, the overall delinquent balance was $43.5 billion, and the outstanding balance was $601.3 billion. Analyzing trends by property type, every sector but one saw a delinquency rate retreat in September. The only sector to see an increase in rate was retail, which rose 34 basis points to 6.76% following back-to-back months of declines. The overall improvement in delinquency trends reflects a robust economy that has enabled properties with strong occupancies to restructure debt maturities.
In an inflationary environment, construction costs will act as a deterrent to new projects and future supply. According to KOW Building Consultants (and reported by Trepp), developers are now seeing visible cost increases because of tariffs. Their models estimate that tariffs have increased framing wood building costs by 3-5%, 5-8% for poured-in-place concrete, and 8-12% for structural steel. For more specific inputs, the cost increases can be well above these ranges. Beyond raw materials used directly in building frames, tariffs are also impacting other manufactured inputs that go into structures, like aluminum windows. Facing uncertain material and financing costs, in addition to qualified labor scarcity, CRE pipelines are likely to shrink in the coming year, as many new projects will no longer be financially feasible.
Westchester Residential Apartments – Effective Rates Stable
Multifamily projects in Westchester, especially South of I-287 which is the focus of this report, continue to demonstrate strong fundamentals and renter demand. However, affordability is also an issue for renters and during the last three quarters, effective rental rates – asking net of concessions- have remained stable. Inflation, affecting all aspects of household finances, and a more difficult employment environment, have all contributed to households feeling less able to reach for the more expensive rentals. Therefore, it appears that, at least for the time being, the room for further gains in rental rates is limited. Vacancy stands at over 6%, which is still low but higher than at any point over the last three years,
The multifamily development pipeline has declined steadily since the start of the rate hike cycle. At present, the pipeline is less than 3% of the stock of multifamily assets, a sharp decline from 12% three years ago. As delivery of new units declines, the balance of supply demand is likely to tilt again in favor of multifamily owners, restoring their ability to keep price increases in par with inflation.
Westchester Offices – Stable Pricing and Occupancy Improvement
Corporate efforts to bring employees back to the office appear to be having some traction. In Westchester, office occupancy has increased more than 1% over the last year as corporates establish minimum office attendance. In Westchester, Q3 marked a return to a favorable supply-demand balance, with demand exceeding supply and strong leasing trends boosting office occupancy. Pricing has been stable as landlords hold the line in the face of cost pressures.
Across the country, the last decade of office operating statements indicates that this sector has been negatively impacted by rising costs, volatile revenue growth, and capital markets repricing. Survival and success of office assets will be a function of proactive management, re-investment in amenities and rigorous cost control. The federal government shutdown, now underway, could negatively impact office landlords that lease to branches of the Federal Government. It is too early to ascertain the financial impact-on the real estate sector- and if there are longer term repercussions.
Westchester Retail – Everchanging Consumer Demands
Westchester Retail shops had a turnaround quarter in a challenging year where big box tenant departures have negatively impacted the sector, Supply-demand was favorable, and occupancy increased marginally. Leasing activity was quite strong, and deals were larger than usual. Pricing remained stable, with a very modest negative impact from discounted sublet space in the mix.
Executive Summary
Westchester has an affluent and educated consumer that is typically at the forefront of trends. Retailers catering to demanding consumers must adapt and evolve. An example is The Westchester Mall in White Plains, which is celebrating its 30th anniversary. Consumers are seeking experiences and landlords are creatively adapting to such demands. New experiential retailers at The Westchester include GOAT USA, Aroma360, and Rivian. Also in White Plains, we have examples of redevelopment of older retail space in the transformation of the former Galleria Mall.
Westchester Industrial – Strong Pricing Trends Continue
Earlier in the year, Industrial assets in Westchester experienced weaker fundamentals due to the logistic changes triggered by tariffs. During the third quarter, supply demand was close to balanced, and leasing was robust, which suggests that adjustments have been made by importers and distributors. Industrial lease pricing was strong as suitable industrial properties are hard to find. Westchester continues to have high demand from the last-mile distribution businesses due to the strong consumer base that populates the County.
Westchester Transactions remain subdued
CRE transaction volumes are still weak, a reflection of an uncertain environment and volatility in financing. Traditional CRE lenders, such as regional banks and insurance companies, have sufficient exposure to this asset class, in particular to office projects, and are looking to trim some exposures. The CMBS market is open, but that market is predominantly for institutions. Cash buyers, SBA loan applicants and seller financing opportunities constitute most of the smaller properties transacting within Westchester.
About this Commercial Real Estate Report
This report was researched and written by Teresa Marziano. Please contact Teresa 914-441-2254 or TMarziano@HoulihanLawrence.com for questions, comments or feedback about the contents of this report.
HOULIHAN LAWRENCE COMMERCIAL TEAM
Commercial real estate is facing a challenging period as low-interest rate loans become due. Interesting commercial real estate investment opportunities will likely become available. Investors must be prepared to evaluate and make decisions expediently as opportunities emerge. Given the consumer and market changes brought about by the intense period of change we have experienced due to structurally higher inflation, higher financing costs, and most recently, policy changes, it is very important to correctly assess market and economic risks that add to the complexities of acquiring commercial real estate. Understanding the ever-changing market forces that are shaping the fundamentals for each property requires a deep knowledge of the property, local and regional insights, and close contacts with the right financial partners. Our Team is highly skilled in all these areas.
Reach out to HOULIHAN LAWRENCE COMMERCIAL for a complementary assessment of your real estate, an evaluation of a purchase target, and to receive an in-depth perspective on the ever-changing Westchester commercial real estate market.
Unemployment Rate in Westchester – Remains Within a Healthy Rate
Services industries, health care and education, continue to drive employment growth in Westchester. The local economy remains resilient in the face of tariffs and a modest cooling of economic trends.
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; October 2025
Multifamily Projects: Deliveries Subside. Affordability a Constraint to Rising Rents
WESTCHESTER, SOUTH OF I- 2 ��
Multifamily deliveries are winding down, and the construction pipeline has decreased. New projects are difficult to justify in the current cost and interest rate environment. Over time, lower new supply is constructive for fundamentals.
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; October 2025
Westchester Office and Retail – Office improves, and Retail is Looking for Stability
WESTCHESTER, SOUTH OF I- 2 ��
Office occupancy is experiencing a recovery. Leasing activity and occupancy has improved markedly as corporations gain traction in bringing workers back to the office a few days per week.
Retail rental prices and occupancy are trying to stabilize after headwinds from large format retail closings.
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; October 2025
Industrial Properties – Demand Weakening Driven by Trade/Tariff Uncertainty
SOUTH OF I- 2 ��
Industrial fundamentals are stable in Westchester; however, trade disruptions due to new tariff regime has brought friction to local warehouses. Price remains resilient.
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; October 2025
Investment Activity Remains Weak as Uncertainty still Weighs on Investors
SOUTH OF I- 2 ��
Investment sales volume remains subdued but median pricing is supported by inflation trends and rising replacement costs.
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; October 2025