US Commercial Mortgage Loans: Quarterly commentary
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Article Type
Insights
Topic
Real Estate
Published
October 20, 2025
Read time
6 mins
Author
Real Assets Applied Research
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Market commentary

As 2025 ends and 2026 approaches, the commercial real estate (CRE) lending market remains liquid, with a broad and accommodating base of capital sources. Flush with cash from strong annuity sales, life insurance company lenders seem eager to finish the calendar year on a strong note and build a healthy pipeline heading into 2026. Due to corporate bond yields that remain near 20-year lows and a relatively stable US Treasury market, lenders have been able to be more aggressive in tightening spreads on available opportunities. As lenders seek yield in a competitive environment, many have turned to asset classes that were deemed unfavorable as recently as two years ago.

 

Focus on Retail

Investor interest in the retail asset class has been building in recent years. That was reinforced after the sector displayed strong resilience following a wave of retail bankruptcies in the first half of this year, which caused an increase in vacancies. Landlords have reported robust backfill demand for the recently available spaces and during the second quarter leasing  “downtime”1 hit the lowest level in three years.2 Releasing anchor space vacated by bankrupt tenants has often been executed at rent premiums of 30% to 40%.3 Meanwhile, high-quality space4 has seen greater demand, with those spaces generally leasing within five months on replacement leases.5

 

Fundamentals in the retail sector have remained consistent during the past four years. Following a slight increase in vacancies just above 5% during the peak of the COVID-19 era, the sector stabilized within 18 months, rebounding to sub-4.5% levels by the first quarter of 2022. Since then it’s averaged 4.1%.

 

Inventory growth has been minimal during the past five years at just over 1%. That has limited new supply, helping to maintain sub-5% vacancy rates and strong rent growth (3.2% annually over the past five years). While inventory levels are forecasted to increase 2.6% in the next five years, analysts anticipate continued durable performance in the sector, with vacancies forecasted to remain below 4.5% and rent growth above 2% through 2030.6

 

Exhibit 1: Net absorption, net deliveries and vacancy

Source: CoStar Group. Data as of September 2025.

 

Based on second-quarter earnings reports, retailers occupying mall and strip centers broadly outperformed expectations. Same-store sales growth beat consensus expectations by roughly 100 basis points on average this year and national retail sales (excluding motor vehicles and gasoline) year to date have increased 5% on a nominal basis and 2% on a real basis.7

 

While retailers have seen strong performance across the board, grocery stores and off-price retailers have seen particularly outsized improvement, driven by a combination of consumer resiliency, reduced shrinkage and muted tariff impacts thus far. The subdued tariff impact is due in part to a lower average tariff rate than forecasted (9% compared to 15%), proactive inventory buildups and certain retailers opting to absorb tariff-driven costs.8

 

Retailers believe that the full brunt of tariffs may still materialize and stretched consumer wallets are prompting a more mindful approach to purchases, which could lead to trading down across categories. The central theme for the remainder of the year is one of cautious optimism.

 

Despite macroeconomic challenges, many retailers—particularly those anchored in strip centers—remain resilient. Off-price chains, grocers and service-oriented tenants continue to benefit from steady demand and value-driven shopping behaviors. Store expansion plans initiated earlier in the year are largely moving forward, with notable growth among specialty and ethnic grocers, health and wellness concepts, as well as quick-service restaurants.

 

Exhibit 2: 2025 Expected net store openings

*Net stores opened year-to-date. Source: Green Street. Data as of September 2025

 

In contrast, certain retail segments are facing headwinds. Home improvement and furniture stores are forecasting flat sales growth, constrained by decreased home buying activity and higher mortgage rates. Drugstores and department stores continue to endure long-standing secular headwinds. In particular, drugstores are facing shrinking profit margins and increased competition, while department stores remain under pressure from e-commerce competition and evolving consumer habits.

 

Conclusion

With clear “winners” emerging across the retail CRE landscape (grocery-anchored, strip centers and off-brand retailers, among others) and continued strength in sector fundamentals, investor interest has accelerated throughout 2025. These assets have demonstrated consistent resilience, supported by tenants that serve the essential needs of (in most cases) value-driven consumers. Despite this increased investor demand (bolstered by tightened corporate bond yields and relatively steady US Treasury yields), we believe retail continues to offer compelling return opportunities, particularly when compared to other asset classes. On average, retail properties are achieving spreads over 20 basis points higher than similar multifamily properties (10-year loans with 50% to 59% loan to value ratios), and over 15 basis points higher than similar industrial properties.9

 

Retail is proving to be more than just resilient, it’s investable. As operators continue to deliver strong results—despite macroeconomic headwinds— and optimism across the sector persists, retail investors appear to be well-positioned to capture strong returns from stable, income-generating assets.

Important disclosures

Author

Real Assets Applied Research
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