Why Economics Matter in Commercial Real Estate
As commercial real estate professionals, we interact with business decision makers every day. In doing so, we learn so much about what drives decision-making. Each of you faces unique daily challenges created by a variety of economic variables.
Some are global, and others are local. Commercial real estate market conditions figure into that mix. As a tenant you need quality space that allows your business to operate efficiently. As a landlord, you focus on occupancy and rent growth. And an owner/user buyer, you are keen on low interest rates to help control your occupancy cost and build equity.
The bottom line is that everyone who uses or owns commercial real estate is impacted by the economics of the time, and that makes it important to carefully study the economic factors that are most likely to influence real estate market conditions in your area. So, with that in mind, let’s take a look at where we are now and what it tells us about what is likely to happen next.
Q4 Market Report Signals a Turning Point
Let’s start with the Q4 Market Report that Voit just released. Net absorption turned positive again, average asking sales prices were up, negative rent growth eased, and for the first time in three years, vacancy decreased.
While we still need to see these trends strengthen to declare victory over what has been a sluggish market since the middle of 2022, we see the final quarter of 2025 as a turning point. Not only did the numbers improve, but there has been a noticeable shift in psychology. By that, we mean that our interaction with business owners and property owners has become more positive in terms of outlook.
A Shift in Market Psychology
Can we present that to you as a statistic? Not yet. Our evidence is anecdotal at this point, but we have been around long enough to sense it when the ground underneath us starts to move. Inquiries for both sale and lease products are up, and the cloud cover of economic uncertainty is beginning to thin. How do we come to those conclusions? Several key factors come to mind.
Four Economic Forces Driving the Market Forward
1. Strong GDP and Market Confidence
First, GDP in the third quarter came in at 4.3%, much higher than most economists expected. Fears over recession due to the projected impact of the “tariff war” on the US economy have, thus far, been overblown. By the end of the year, our trade deficit with China had fallen by half.
Trade with Mexico, our largest trading partner, increased, and manufacturers around the world made significant commitments to build their products here in the US, which will support future GDP growth. Also, numerous trade agreements are in negotiations, which, when finalized, could further narrow our trade deficit, a major goal of the current administration.
Preliminary estimates for Q4 GDP remain upbeat, and the equities market is on a bullish tear. The Dow Jones Industrial Average is flirting with 50,000, a level that surprises even the most optimistic prognosticators. Investors are responding to the renewed interest in onshoring of critical manufacturing sectors, which has touched off a firestorm of investment in chip manufacturing and data centers that support advances in AI technology, a key to future productivity growth.
2. Interest Rate Relief from the Federal Reserve
Second, the Fed lowered its benchmark Fed Funds Rate again in December, which should encourage more borrowing to support capital investment across the board. Inflation, while still above the Fed’s target rate, has eased, a fact which surprised many experts who thought that the administration’s tariff stance would reignite the inflationary cycle that topped out at 9.1% in 2022.
3. SBA 504 Rates Revive Owner/User Demand
Third, SBA 504 commercial mortgage rates are back under 6%, down 70 basis points since this time last year. That is one of the reasons we have seen renewed interest in owner/user purchases, as many would-be buyers have been waiting for rates to fall before making their acquisitions.
The breaking of the 6% barrier has given this market segment enough of a psychological boost to normalize transaction activity in 2026. Pricing is still near the market peak of 2022 for the most functional, well-located properties.
So, talk of a major market correction, another reason buyers have remained on the sidelines, has been silenced. We see sales activity picking up substantially in the coming months as buyers actively re-enter the market to secure quality facilities before an increase in demand puts upward pressure on pricing.
4. The One Big Beautiful Bill Act of 2025 (OBBBA)
Fourth, the One Big Beautiful Bill Act of 2025 (OBBBA) is a game-changer for the business community. It makes permanent many of the tax incentives in the Tax Cuts & Jobs Act of 2017 that were due to sunset at the end of 2025. In particular, 100% bonus depreciation on expenditures with a useful life of 20 years or less has been made permanent.
Essentially, capital expenditures can be expensed in the year they are placed in service as if they were operating expenses. That is a huge motivator for business owners to expand their operations to grow revenue and increase profits.
For the purchase of commercial real estate, the benefits are even greater when bonus depreciation is combined with Cost Segregation Depreciation. This accelerated depreciation methodology will allow most purchasers to recoup most or all of their down payments by way of tax savings in year 1. Click here for more on this topic. This redefines the term “no-brainer,” and we fully expect this alone will have a significant impact on sales activity in 2026.
Why 2026 Is the Year to Act
These and other factors, we believe, will be the call to action that many have been waiting for. Transaction activity for both sale and lease products has been sluggish for over two years due mainly to uncertainty and inflation, both of which appear to be on the wane.
That means that demand has been held back like water rising behind a dam. So, for many, they see this as a time to go on offense again to beat a potential flood of demand that could overwhelm the limited supply of quality space and cause another price spike.
Your Next Move
Your best path is unique to you and your circumstances. We are here to help you ask and answer the questions that will put you on the right path. Just give us a call.