Commercial real estate deals are slowing, but these two beleaguered sectors are shining

Commercial real estate (CRE) dealmaking in 2025 is experiencing a significant slowdown, with overall transaction value growing only 5% year-over-year as of Q3 and remaining below pre-pandemic levels. Despite this, September data from Moody's indicates a pronounced "flight to quality," characterized by an increase in average deal size and a 35% rise in $100M+ transactions, as investors prioritize higher-quality assets. While the hotel sector saw a 30% decline in deal value due to reduced business travel, interest is re-emerging in the office and retail sectors, with tech companies acquiring discounted office properties and institutional investors like Nuveen actively investing in open-air retail centers, signaling a strategic shift towards resilient asset classes.

Analysis

Commercial real estate (CRE) dealmaking in 2025 shows a significant slowdown, with overall transaction value growing just 5% year-over-year as of Q3 and remaining below pre-Covid levels. However, September data reveals a "flight to quality," with average deal size increasing to $12.7 million and $100M+ transactions rising 35% in Q3, as investors prioritize higher-quality assets amidst uncertainty. Sovereign debt funds are noted as contributors to this capital flow.

Sectoral performance is divergent; the hotel sector experienced a 30% decline in deal value in September, largely due to reduced business travel. In contrast, the office sector is seeing renewed interest, with tech giants like Apple ($365M) and Nvidia ($83M) acquiring properties, often at significant discounts (e.g., Metlife's 39% discount). This indicates a strategic move by cash-rich companies to secure assets.

Open-air retail also emerged as a "big winner," attracting nearly $500 million in September from investors like Nuveen and Tanger. These investments target resilient strip centers, acquired at below replacement cost for strong risk-adjusted returns, despite broader concerns about consumer confidence. The overall market sentiment is mixed and cautious, reflecting these bifurcated trends.

Key Decisions for Investors

• Investors should prioritize high-quality CRE assets, aligning with the observed 'flight to quality' and institutional capital flows.
• Consider strategic acquisitions in the office sector, focusing on properties available at significant discounts, especially for corporate users.
• Evaluate opportunities in resilient open-air retail centers, which are demonstrating strong risk-adjusted returns despite broader consumer sentiment.
• Maintain caution regarding the hotel sector due to ongoing weakness from reduced business and international travel, suggesting careful due diligence or avoidance.