After nearly two years of elevated interest rates and shifting market conditions, commercial real estate investors find themselves at an unusual juncture. Despite clear increases in borrowing costs and economic uncertainty, cap rates remain surprisingly sticky. At the heart of this dynamic is a fundamental disconnect between sellers holding tight to earlier valuation benchmarks and buyers recalibrating for heightened risk. The result is a cautious, fragmented market—one defined less by distress than by recalibration.
Nationwide, pricing dislocation is now less about distress and more about perspective. Sellers remain anchored to past comps. Buyers are focused on forward-looking yields and risk-adjusted returns. And while capital is returning, particularly for smaller, well-leased deals, many transactions still stall due to valuation gaps neither side is willing to close. In many cases, it’s not that buyers and sellers are far apart on value—it’s that they’re speaking different pricing languages shaped by past cycles versus current risks.
STICKY, NOT STATIC
Lee & Associates’ Q2 2025 data shows average national cap rates holding steady around 5.4% to 5.7% for multifamily, 6.2% to 6.5% for industrial, 6.8% for retail, and approximately 7.3% for office. Yet these broad averages obscure growing dispersion. Davidson Kempner reports that cap rate spreads across sectors are near 25-year highs, particularly in office, hospitality, and non-credit retail—a sign of increasing investor caution.
Even within asset types and regions, variability is notable. According to CoStar’s Q3 2025 data, industrial cap rates have expanded roughly 150 basis points since 2021, typically hovering around 6%. Specialized industrial assets such as cold storage or flex often trade closer to 6.6%, while logistics hubs can reach 6.9%.
Class A industrial in Southern California still trades near historically low 5% cap rates, while transitional suburban office in the Midwest may require yields of 8.5% or more. Many deals obscure cap rate movements through concessions such as tenant improvements or credits, complicating true valuation clarity. These adjustments often mask a steeper underlying repricing trend.
SELLERS HOLD THE LINE - BUT FOR HOW LONG?
Seller resistance isn’t always irrational. In coastal markets with strong leasing fundamentals and limited new supply—particularly for assets like small-bay industrial and grocery-anchored retail—sellers are maintaining pricing power, supported by tenant demand and stable cash flows.
But market realities diverge in overbuilt multifamily markets and larger-format office properties. Trepp’s TPPI data highlights that institutional-grade assets have experienced sharper value declines, particularly for complex or aging properties. CREXi shows office sales averaging cap rates of 7.44%, even as sellers continue listing closer to 7.02%—a meaningful gap, with DOM now averaging 239 days.
Many long-term owners remain anchored to peak valuations from two to three years ago, anticipating rate cuts and holding out hope for a return to 2021-era pricing. But the reality of aging assets, deferred capital improvements, regulatory pressures, and maturing debt is driving a gradual increase in transactional activity. In Seattle, for instance, multifamily sales volumes rose 92% in the first half of 2025 over the prior year, as private owners began adjusting expectations. For some, capitulation is no longer optional—it’s a matter of survival or balance sheet cleanup.
THE NEW BUYER RISK PREMIUM
Buyers are recalibrating underwriting assumptions to reflect forward-looking risks: lease rollover exposure, tenant credit, refinancing hurdles, operational cost escalation, and tariff-related inflationary pressures. CoStar’s Office Report points to transactions at $68/SF in Philadelphia and $104/SF in Charlotte, illustrating steep discounts driven by risk aversion.
Buyers are more focused than ever on refinancing timelines, insurance premiums, and lender-imposed reserves. Operational expenses are a major focus, with insurance, life safety upgrades, and deferred maintenance under scrutiny. Electrical panel replacements, elevator systems, and HVAC units are frequent sticking points in negotiations, often resulting in seller-funded repairs or pricing adjustments. Assumptions around future rents and renewal probability now play a central role in underwriting, with downside scenarios baked into pricing models. READ THE FULL ARTICLE>
