Key topics covered in this article:

  • Market Trends and Drivers: Commercial real estate is stabilizing, with sectors like data centers, retail, and multifamily housing showing strong activity, while office spaces continue to adapt to hybrid work trends.
  • Economic and Policy Impacts: Rising construction costs, high borrowing rates, and tax law changes like restored 100% bonus depreciation are shaping project planning and investment strategies.
  • Technology Adoption: Proptech and AI are transforming real estate operations, from leasing and cost management to cash flow modeling and asset tokenization, with rapid adoption expected in 2026.

As we reflect on the past year, it is clear that 2025 has been a year of both remarkable challenges and significant progress. From navigating ongoing economic uncertainties (such as Tariffs) to embracing breakthroughs in technology (see Proptech and blockchain articles), we’ve seen our industry adapt in ways that were once unimaginable. Commercial real estate is ending the year with a mixed but increasingly stable outlook. The broader U.S. economy is expected to grow at a modest pace in 2026, with inflation easing from its peak and no sharp downturn in sight. Some sectors are still adjusting to changes in demand and tenant preferences, while others are gaining speed. Data centers, retail, and select industrial and multifamily markets are seeing the most activity, and many owners are using this period to upgrade assets and reposition portfolios. This update looks at how the market is shifting and where business leaders are adjusting their approach in response.

Overview of Market Conditions and Drivers

Financing and costs are the main story heading into 2026. Construction inputs are more than 40% higher than in early 2020, and borrowing is still expensive. The positive side is that the Fed has started to cut rates, with more decreases expected in early 2026, and inflation is edging downward. A surge in large-scale projects is expected throughout the year.

On the other side of the coin, roughly $1.5 trillion in commercial real estate debt is expected to come due by the end of 2026. A large share is concentrated in office and retail properties. Some owners are restructuring loans or selling assets. Others are waiting to see how pricing and rates evolve over the next few quarters.

Policy continues to make headlines. Tariffs have pushed construction budgets higher with materials like steel and aluminum at 50% duties at different points this year. On a local level, zoning and local conditions are changing the opportunities available to developers. Many jurisdictions are revisiting height limits, parking requirements, and conversion rules to encourage housing and mixed-use projects. Access to power and grid capacity has become a key site-selection issue for data centers and advanced manufacturing. Developers are looking at average timelines for approvals and utility capacity when deciding where to focus their next round of projects.

Tax law changes are another planning lever. OBBBA restores 100% bonus depreciation for qualifying property placed in service after January 19, 2025, and it brings back the EBITDA-based limit on business interest deductions under Section 163(j). These provisions affect project timing, capital stacks, and after-tax returns, keeping tax strategy on the table in early-stage planning.

Sector-by-Sector Outlook: Where Investment Is Heading

Data Centers — Data centers are now one of the busiest types of projects in the country. Construction starts hit record levels in 2025, with tens of billions of dollars in work already underway and more lined up. Recent data also suggests that data center construction could quadruple by 2030, driven by demand for AI and cloud services.

For data center developers, this means projects that need a lot of power and space. Most new activity is landing in places that can offer both, like Northern Virginia, Dallas–Fort Worth, Phoenix, and parts of Texas and Louisiana. Related infrastructure, like fiber networks and cell towers, is also seeing steady investment. Developers who line up utilities and zoning approvals early are in the best position to win these projects.

Industrial & Logistics — Warehouse and storage centers still make up the largest segment of commercial real estate; it’s expected to account for 24% of total industry revenue in 2025. After a long run of growth fueled by e-commerce, demand is starting to stabilize. Construction activity is strongest near major highways, ports, and rail lines. This helps with long-term supply chain strategies. This type of tenant is looking for a flexible layout with room for automation and future expansion.

Retail — Retail has been quietly picking up steam, especially in suburban neighborhoods where foot traffic stays steady. Shopping centers anchored by grocery stores or well-known brands are leading the way. Vacancy rates are holding around 5%, a level that’s far better than what the industry has seen in recent past. Developers are focused on reworking older buildings into open-air concepts that blend entertainment, food, and outdoor event space. This experience-based retail model is attracting a new and diverse foot traffic, especially in suburban areas.

Office — The office market is still in flux. Remote and hybrid work continue to affect how much space tenants need, and the national office vacancy rate came in at 18.8% for the third quarter of 2025, according to CBRE. That figure is still high by historical standards, but it represents the first year-over-year decline in vacancy since early 2020, suggesting the early stages of a recovery. Companies are holding off on long-term leases, or exploring flexible options instead. This is widening the gap between aging Class B and C buildings and modernized Class A properties. In response, more owners are investing in upgrades, and in some cases, converting space to residential or mixed use.

Multifamily — Multifamily housing continues to hold steady as more people choose renting over buying. High interest rates and rising home prices have made ownership harder to reach, especially for younger households and first-time buyers. Additionally, many office spaces are being refurbished and converted into apartments. Multifamily vacancy rates are averaging 4.4%, which is a positive sign for investors looking at this sector. Construction in this sector is expected to slow considerably in 2026, which may support occupancy and rents at existing properties.

Strategic Considerations

With costs rising and policy decisions in constant motion, many commercial real estate leaders are keeping a closer eye on how projects are planned and financed. Capital is shifting toward sectors that offer more stability. Data centers, retail, and hospitality are drawing the most investment.

Technology is also having a huge impact on real estate. Proptech platforms are helping teams track leasing, manage expenses, and monitor building performance in real time. Artificial intelligence (AI) is being used to model cash flow, run cost comparisons, and flag potential issues earlier in the planning process. Adoption is early, especially for AI, but look for it to quickly accelerate in 2026.  As well, tokenization in real estate is sure to become a major trend in the industry in 2026 and beyond as digitization of assets become more the norm.

Conclusion

Commercial real estate is gaining momentum. Developers and owners that are recalibrating strategies to match local conditions and tenant expectations have the greatest long-term growth potential. As well, those forward thinking real estate professionals and investors willing to adopt new technologies will find themselves at the tip of the spear heading into 2026. We are prepared to For more information about your unique situation in real estate, contact Ryan Paul, Partner on PBMares’ Construction & Real Estate team.