The second quarter of 2025 delivered a mix of results across all financial markets. The real estate sector continued to show signs of stabilization and tailwinds from new economic policies. Inflation remains more stubborn than the Fed had hoped, keeping rates elevated. Still, forward guidance now points to potential rate cuts in 2026, but these forecasts are a long way from the steep projections we were hearing at the end of last year.
In financial markets, caution lights are flashing. A recent Bank of America global fund manager survey, which surveyed 169 managers managing $413 billion in assets, found that a record 91% believe U.S. stocks are overvalued. Other highlights from the poll include that 45% believe the most crowded trade is long the Magnificent Seven and 23% are short on the US dollar.
The passage of the One Big Beautiful Bill Act (OBBBA) brings long-term clarity to several federal tax provisions crucial for commercial real estate, most notably the reinstatement of 100% bonus depreciation and the new Qualified Production Property (QPP) deduction. These policy improvements, along with expanded Opportunity Zones in rural areas, enhance deal underwriting and will ultimately encourage more manufacturers to bring operations back to modern U.S. facilities and enable developers to underwrite with greater confidence over a longer timeline.
Office Sector Update
In the office space, vacancy still stands at nearly 18.4%, but net absorption is finally trending positive, currently at 1.5 million square feet year-to-date. That’s the first sign of leasing momentum we’ve seen in some time. New supply continues to remain limited at just 31 million square feet, which is underway now, versus 158 million at the 2019 peak. We expect this trend to continue driving the Class A+ vacancy rate down.
On the capital markets side, office transaction volume increased by more than 50% year-over-year, driven by trophy assets and the repositioning of institutional portfolios. Class A+ remains in high demand, while the value or commodity space lags behind. That bifurcation aligns directly with our strategy; we are focused on high-quality acquisitions in select markets where tenant demand is strong and supply remains constrained.
Industrial Sector Update
The industrial sector is continuing to show signs of strength, even in this higher-for-longer interest rate environment. The vacancy rate inched up slightly to 7.2%, but asking rents continued to climb, up 4% year-over-year to $10.54 per square foot. What’s notable is how leasing demand is shifting: manufacturing now makes up almost 19% of total U.S. industrial leasing volume, up from just 4% in 2018. The manufacturing renaissance is real, and OBBBA’s QPP and bonus depreciation provisions will only accelerate it. We are continuing to target the secondary markets, which have a strong labor pool, lower cost per square foot when compared to gateway markets, and the required energy capacity.
Within our portfolio, we are evaluating selective dispositions in net-lease sectors to capitalize on strong pricing. On the direct investment front, in may we closed on the $44 million acquisition of 1600 Smallman in Pittsburgh. This asset is one we continue to be very excited about as it is the nicest office space in the market.
As we enter the second half of 2025, we see a promising setup: favorable tax policies, potential rate cuts, cautious yet opportunistic capital markets, and a bifurcated real estate landscape. Our focus continues to be on investing in high-quality assets at deep discounts to replacement cost, leveraging the OBBBA’s permanence to generate strong after-tax returns.
