The latest data from Moody’s Analytics reveals a significant slowdown in US commercial real estate (CRE) transaction volume, which has decreased by 24% year-over-year in Q3 2025. This downturn reflects persistent macroeconomic uncertainties and elevated borrowing costs. However, a notable exception exists within the industrial and data center sectors, where transaction activity has shown resilience, highlighting a bifurcated market landscape.

In Q3 2025, the industrial sector experienced a modest yet positive growth of 2% in transaction volume compared to the previous year. Similarly, data center transactions increased by 5%, signaling robust demand in these areas. This growth contrasts sharply with the office and retail sectors, which saw declines of 30% and 18% respectively. The stark divergence among these sectors illustrates how investor sentiment is shifting towards assets that are perceived as more stable and resilient.

Lending conditions remain stringent, with average loan spreads now 30 basis points wider than in Q3 2024. This tightening of credit is making it increasingly difficult for regional and middle-market players to engage in transactions, particularly outside of the "winning" sectors such as industrial and data centers. As a result, capital allocation is becoming more selective, favoring asset types that demonstrate stable demand and reduced risk exposure to economic fluctuations.

Institutional investors are reallocating capital towards the industrial and data center sectors, which are viewed as "defensive" investments amid ongoing economic uncertainty. This flight to perceived safety underscores a clear shift in investment strategies, as capital seeks operational resilience and stability in the face of market volatility. Conversely, office and retail sectors are experiencing a marked slowdown as risk aversion continues to influence decision-making.

The bifurcation in deal activity highlights significant challenges for private capital and smaller operators. As institutional capital concentrates in high-demand sectors, those lacking scale or access to lower-cost debt may struggle to compete. This dynamic not only limits price discovery in weaker segments but also constrains liquidity, raising concerns about the viability of smaller players in a tightening market.

As we look ahead, the ongoing divergence in capital allocation will likely continue to reshape the commercial real estate landscape. If lending conditions remain tight, and macroeconomic uncertainties persist, we could see further concentration of investment in resilient sectors. Local and mid-market sponsors must adapt their strategies to navigate tighter liquidity and higher financing costs, which will impact acquisition, refinancing, and disposition decisions.