The Fed’s Pivot and What It Means for Retail Property Values Going Into 2026
By Ray Kang, CCIM — Ray CRE Broker
Data as of October 25, 2025
Sources: Federal Reserve, BLS, BEA, CoStar Group (U.S. Retail Capital Markets Report – National, Oct 25, 2025)
A Turning Point for Retail Investors?
For the first time in two years, the Federal Reserve began lowering rates—cutting the federal funds rate by 25 basis points to 4.00–4.25% in September 2025. Chair Powell called it a “measured recalibration,” emphasizing that while inflation progress continues, the Fed’s next moves will depend on incoming data, not a fixed timeline.
Source: Federal Reserve, U.S. Treasury
The effects are already visible. The 10-Year Treasury briefly dipped below 4% in mid-October—the lowest point since early 2024—easing borrowing costs and improving investor sentiment across real estate sectors.
Inflation remains on a downward path:
CPI (September): 3.0% year-over-year
Core PCE (August): 2.9% year-over-year
Fed Funds Rate: 4.00–4.25%
10-Year Treasury Yield: 3.98% (as of October 16, 2025)
While these shifts haven’t triggered a rush of new deals yet, they’re setting the tone for what’s likely to be a steadier, more active investment environment heading into 2026.
Where Retail Property Stands Now
According to CoStar’s U.S. Retail Capital Markets Report (National, Oct 25, 2025), the retail investment market has found a floor after two years of recalibration:
| Metric | Current (Oct 2025) | Trend vs 2024 |
|---|---|---|
| Vacancy | 4.4% | Slight uptick (+0.3 pp) |
| Availability | 5.3% | Stable |
| 12-Mo. Net Absorption | −5.3M SF | Slightly negative |
| 12-Mo. New Deliveries | 43.7M SF | Below historical average |
| Rent Growth (YoY) | 1.8% | Moderated |
| Average Cap Rate | 7.2% | Flat since mid-2024 |
| Average Sale Price / SF | $218 (+1.9% YoY) | Modest increase |
| 12-Mo. Sales Volume | $70.5B | +8% vs 2024 |
U.S. Retail Market Cap Rate (2020-2026) - Transaction activity has returned to pre-pandemic levels as buyers and sellers are more aligned on pricing.
U.S. Retail: Vacancy and Rent Growth (2019-2025 YTD) - Vacancy edges higher as rent growth normalizes — sign of stability, not stress.
Source: CoStar National Retail Data (Q2 & Oct 2025).
In short: fundamentals are steady. Demand softened slightly in early 2025 due to national retailer closures, but the lack of new construction and limited available space have prevented any meaningful erosion in property values.
What to Expect by Year-End
Cap Rates and Pricing
Cap rates are expected to hold near 7.0–7.2% on average, with high-credit single-tenant assets trading below 6% and most grocery-anchored or multi-tenant strips in the mid-6s to low-7s.
If the 10-Year Treasury stays near 4%, some compression could occur in early 2026, especially for stabilized centers with long-term leases.
Transaction Volume
Investment volume is trending toward $70–75 billion by year-end, marking a clear rebound from 2023 lows. REITs and private buyers are re-entering the market with more confidence, supported by improving financing visibility.
Leasing & Rent Growth
CoStar data shows rent growth of 1.8% year-over-year, down from 3–4% in the pandemic rebound years.
Most leasing activity is concentrated in service-based tenants—QSR, medical, fitness, discount, and automotive—while soft goods remain cautious.
Construction Discipline
With starts and space under construction trending lower, the new-supply pipeline remains tight. This is critical: less than 1% of total retail inventory is currently under construction, helping keep fundamentals stable despite slower demand.
New supply remains limited, offsetting demand loss.
Source: Costar Big Book U.S. Retail Trends Q2 2025; October 2025 Update.
Cap Rate Spread to 10-Year Treasury (2019-2025)
What Smart Owners Should Be Doing Now
Recalculate Return on Equity (ROE).
As equity builds and cap rates level off, yield on equity quietly erodes. Understanding your property’s ROE helps determine whether to refinance, improve, or sell.
Prepare for a Better Refinance Window.
With borrowing costs easing, refinancing early could improve cash flow or unlock trapped equity.
Tighten Operations.
Clean rent rolls, reconcile CAM charges, and lock in renewals. Properties with strong documentation trade faster when liquidity returns.
Plan Ahead of the Crowd.
Many owners wait for “the next hot market.” The better move is to optimize during stability—before momentum builds and competition intensifies in 2026.
By the Numbers — October 2025
| Indicator | Reading | Source |
|---|---|---|
| Fed Funds Rate | 4.00–4.25% | Federal Reserve (FOMC 9/17/25) |
| 10-Year Treasury | 3.98% | U.S. Treasury (10/16/25) |
| CPI (YoY) | 3.0% | BLS (Sept 2025) |
| Core PCE (YoY) | 2.9% | BEA (Aug 2025) |
| Retail Vacancy | 4.4% | CoStar (Oct 25, 2025) |
| Rent Growth | 1.8% | CoStar (Oct 25, 2025) |
| Cap Rate | 7.2% | CoStar (Oct 25, 2025) |
| 12-Mo. Sales Volume | $70.5B | CoStar (Oct 25, 2025) |
Outlook for 2026
As we close out 2025, the market is steady, not overheated—a rare sweet spot for retail investors.
Rates are easing, consumer demand is holding, and new construction remains limited. The first movers into 2026 will be those who’ve already stress-tested their portfolios and prepared to act.
Need to know where you stand?
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