Commercial real estate is recovering—but not evenly
The latest transaction data point to a recovery that is narrower and more selective than the broad headlines suggest.
Smaller commercial properties are regaining value and trading close to prior highs. Larger, more expensive assets—many of them institutional-grade properties in major markets—are still under pressure.
That contrast was visible in CoStar’s August repeat-sales data, reported September 30. The equal-weighted Commercial Repeat-Sale Index, which gives each property similar influence, rose 1.4% for the month and ended just 0.5% below its March record. The value-weighted index, which is more influenced by large properties, fell 1.3% from July and remained 19.4% below its July 2022 peak.
The result is an increasingly bifurcated market. “CRE is recovering” can be true for one part of the market and misleading for another.
What the data actually show
CoStar’s analysis covered 1,534 properties that had sold at least twice, allowing the firm to compare current prices with prior transaction values.
The smaller-property index posted its first monthly gain since March 2026. Meanwhile, the value-weighted index extended a five-month losing streak.
The distinction matters because the two indexes answer different questions:
- The equal-weighted index better reflects the large number of smaller transactions taking place across secondary and tertiary markets.
- The value-weighted index more closely reflects the performance of larger assets and institutional investment markets.
The August results suggest that demand has returned more decisively for smaller, more manageable properties than for major assets requiring substantial equity, complex financing, or aggressive assumptions about future income.
But this is not yet a broad-based recovery. Repeat-sale transactions declined 8.6% from August 2025, while repeat-sale dollar volume fell 10.3% year over year to $11.3 billion.
In other words, prices for some smaller assets are improving even as overall activity remains subdued.
That combination usually signals selectivity—not a return to easy liquidity.
Why smaller assets are finding buyers first
Smaller properties have several advantages in the current environment.
First, the equity requirement is more manageable. A private investor, local partnership, or smaller syndicator may be able to fund a $3 million to $10 million acquisition without competing directly with institutional funds or assembling a very large capital stack.
Second, smaller transactions can be easier to underwrite. A neighborhood retail center, small-bay industrial building, or modest apartment property may have a more understandable tenant base and a simpler business plan than a large portfolio or high-rise asset.
Third, smaller assets are more common in secondary and tertiary markets, where pricing can still offer a yield premium relative to major gateway markets. Marcus & Millichap reported in September that more than half of transactions across the four major property types occurred in tertiary markets during the trailing 12 months through June 2026. The firm also found particularly strong growth in deals priced between $1 million and $10 million.
That does not mean every small property is attractive. It means the buyer pool is deeper for assets that fit the financial capacity and operating model of private capital.
For passive investors, this trend may show up through sponsors who focus on smaller multifamily, industrial, retail, medical office, or mixed-use properties rather than large institutional acquisitions.
Why large assets remain under pressure
Large properties face a different set of problems.
Many were purchased or refinanced under assumptions that no longer hold: lower interest rates, faster rent growth, tighter exit cap rates, or stronger demand for certain types of office and multifamily space.
When those assumptions change, the problem is not simply that buyers want a better price. The asset may also require more equity, more capital improvements, or a longer hold period before its projected value becomes achievable.
CoStar’s August data showed losses across office, multifamily, retail, and industrial properties in the value-weighted measure. Office remained the most challenged category, with 265 repeat transactions producing a combined loss of $324.5 million from prior values. Retail also declined, with 455 repeat sales recording a combined loss of $42.4 million.
There were areas of strength. Industrial properties posted an aggregate gain of $825.9 million across 391 repeat transactions, while multifamily properties gained $349.8 million across 231 transactions. Those gains, however, did not erase the broader weakness affecting larger assets.
The lesson is that property type alone is not enough. Size, basis, market, financing structure, and tenant durability all matter.
What this means for passive investors
The current market rewards selectivity at both the property and sponsor level.
A passive investor should not assume that a fund or syndication focused on “high-quality assets” is automatically safer. Large assets can carry greater refinancing needs, more complex leasing exposure, and higher capital requirements—even when they appear institutionally attractive.
At the same time, smaller assets should not be treated as risk-free simply because they are trading well. A smaller property may have less diversification, fewer tenants, thinner local liquidity, or greater dependence on one operator’s execution.
The practical question is not whether small or large is better. It is whether the investment’s scale matches its business plan and financing structure.
Important questions include:
- How much debt matures during the projected hold period?
- Is the underwriting dependent on rent growth, a lower exit cap rate, or both?
- How concentrated are the tenants and revenue sources?
- Does the sponsor have experience operating in the specific secondary or tertiary market?
- How much reserve capital is available for leasing, repairs, insurance, taxes, and debt-service shortfalls?
- Is the projected exit dependent on selling to another highly leveraged buyer?
These questions matter more when transaction volume is still below prior-year levels. A property may be priced near a recent comparable sale, but that does not guarantee a deep buyer pool when the investor eventually needs liquidity.
The market may be moving down-market—not broadly recovering
The most important takeaway from the August data is that improving prices do not necessarily mean the entire CRE market has turned.
Capital appears to be moving toward properties that are smaller, easier to finance, and potentially more understandable to private buyers. Larger assets remain caught in a slower process of price discovery.
That creates a market where transaction headlines can be misleading. A handful of large deals may suggest renewed confidence, while repeat-sale data show continued weakness among high-value properties. Conversely, strong activity in smaller assets may indicate real demand without proving that institutional pricing has stabilized.
Passive investors should watch three indicators over the next several quarters:
- Whether the value-weighted index stops declining. A sustained stabilization would suggest that larger assets are finally finding a clearing price.
- Whether small-property gains broaden across markets and property types. A narrow rebound in select submarkets would be less meaningful than consistent improvement.
- Whether transaction volume rises alongside prices. Price increases supported by very few trades can be fragile, particularly when financing costs remain elevated.
For now, the CRE recovery is best understood as a two-speed market. Smaller properties are attracting capital and approaching prior pricing peaks, while larger assets continue to absorb higher financing costs and changing operating assumptions.
That split does not eliminate opportunity. It does, however, make diversification, conservative leverage, sponsor quality, and asset-level underwriting more important than a simple bet on a broad market rebound.
