Falling tenant demand for commercial space drove down property values in May, setting up the second quarter to be an extension of the first as lower tenancy holds back prices even as buyers return to the market.
Reduced occupancy is most responsible for driving down prices among the higher quality and more expensive properties often bought by institutional investors, and less among smaller deals bought more often by private investors. That's according to the latest monthly CoStar Commercial Repeat-Sale Indices, which tracks when a previously sold property trades hands again in a process called a repeat sale.
Tenants are returning space to the market faster in the second quarter. The net gain or loss of occupied space is playing out differently between premier, investment-grade properties and the rest of the commercial real estate market. In the three major property types — office, retail and industrial — for the second quarter, tenants were projected to vacate 50.9 million square feet, according to the CCRSI. Since the start of 2025, 83.9 million square feet of formerly occupied space has become available.
"Investment grade properties are projected to account for nearly 60% of the negative net absorption," said Chad Littell, national director of U.S. capital markets analytics for CoStar Group and author of the CCRSI report. "Meanwhile, the general commercial segment is expected to contribute about 40%."
"The most recent period marks the 13th consecutive quarter of declining 12-month net absorption," he added.
The CCRSI value-weighted U.S. composite index, more heavily influenced by high-value trades, declined for the third consecutive month in May, dropping 1.3% compared to the prior month. The value-weighted index fell 3.5% across March, April and May.
Meanwhile, the equal-weighted U.S. composite index, reflecting the more numerous but low-priced property sales typical of secondary and tertiary markets, fell 0.6% from April to May. The equal-weighted index has stagnated over the past three months with no change in value.
Nonresidential properties have taken the biggest hit to property values over the past three months, falling 1.8%, according to the CCRSI. Multifamily values are down just 0.3% over the past three months.
Buyers returning
Amid the weakening property prices, buyers are returning to the market for investment-grade properties, while private investors are falling back.
Repeat sales transaction activity climbed to $10.2 billion in May, a 1.2% increase from the prior month, according to the CCRSI.
Investment-grade transaction volume led with a 3.8% increase in May to $5.8 billion, while the general commercial segment fell 2.2% from the prior month to $4.3 billion.
The composite pair volume, or total repeat sales, of $129.5 billion during the 12 months ending in May was 26.8% higher than the 12-month period that ended in May 2024.
"As some institutional investors have picked up buying activity among their favored property types, the investment grade segment increased 34.7% over the 12 months to $78.1 billion," Littell noted.
This month's CCRSI is based on 1,491 repeat sale pairs and 325,761 repeat sales since 1996.