Ron Mgrublian

*Source: Lee & Associates Q3 2025 North America Market Report

The report from Lee & Associates discusses the implications of the Federal Reserve's "higher for longer" interest rate policy on commercial real estate (CRE) investments in 2025. Following a modest 0.25% rate cut in September 2024, bringing the benchmark to 4.00%-4.25%, the Fed signals cautious easing amid persistent inflation (core at 3.1%, headline at 2.9%) and internal debates on neutral rates (ranging from 2.5% to 4%). This environment shifts CRE from momentum-driven to performance-based strategies, with elevated borrowing costs (often >6%) repricing risk, portfolios, and values. Key themes include structural rate pressures, refinancing crises, sector divergences, cap rate tensions, and adaptive investment approaches.

Key Challenges

• Persistent Rates and Inflation: Sticky inflation in housing and services keeps rates high, with 10-year Treasuries near 4%. Lenders demand stronger sponsorship, conservative leverage, and NOI stability, leading to tighter spreads and shorter terms. The recent cut offers short-term relief but minimal impact on long-term capital.
• Refinancing Risk: $1.5 trillion in CRE loans mature by end-2025, prompting short-term extensions. Properties from peak eras face shortfalls, especially in office and multifamily sectors. Markets like Dallas, Atlanta, and Phoenix see stretched debt-service ratios, forcing sales, payoffs, or defaults.

Sector-Specific Impacts

• Office: Undergoing restructuring with vacancies >20% in cities like Denver, Chicago, and San Francisco (especially Class B/C). Flight-to-quality persists, but even premium assets face tenant risks. Conversions to lab/residential/flex space rise, with trades at 30-70% discounts from peaks.
• Multifamily: Favored but divergent—urban cores (e.g., New York, Boston, LA) stabilize with low vacancies; Sun Belt oversupply (e.g., Austin, Raleigh) leads to concessions and 10%+ vacancies. High costs, rent caps (e.g., Washington's ~9.7% in 2026), and extended lease-ups complicate deals. Private buyers target below-replacement-value assets.
• Industrial: Remains strong but cooled, with national vacancy at 7.4%. Big-box absorption slows in Phoenix and Chicago, but infill/last-mile/flex/cold storage thrives in constrained markets due to tenant retention and limited supply.
• Retail: Resilient with 4.3% national vacancy. Grocery-anchored and experiential assets outperform in Miami, Charlotte, and San Diego. Bifurcation exists: outdated centers in tertiary markets soften, while cash-flowing properties attract private capital.

Cap Rates and Valuation

Cap rates appear stable nationally but mask a buyer-seller standoff—sellers cling to peak pricing, buyers factor in risks. Tension persists into late 2025, especially in multifamily and industrial, with repricing often subtle rather than overt yield shifts.

Investment Strategies for the New Normal

Investors shift from Fed-pivot anticipation to disciplined execution:

• Prioritize In-Place Cash Flow: Stabilized income hedges against costs and dislocations.
• Operational Execution: Focus on leasing, expense control, and targeted repositioning over major capex.
• Underwrite Exits Upfront: Deals must stand alone, assuming full-cycle ownership.
• Creative Financing: Use seller carrybacks, preferred equity, and hybrids to bridge gaps.
• Value-Add Focus: Target assets with fixable issues (e.g., leasing friction) without overcapitalizing.

Conclusion

The report emphasizes CRE's maturation in a rate-sensitive era, rewarding pragmatism and local insight. The Fed's cut boosts confidence modestly, but elevated rates are the baseline—opportunities lie in fundamentals, not speculation. Insights from Lee professionals highlight fragmentation and selectivity.

BUILDING SIZE: ±18,000SF

LOT SIZE: ± 36,000 SF Lot Land

ZONING: LA Unincorporated M2

• Free Standing Industrial Building

• Fenced/Paved Yard area

• No City Business Tax

• 3 Ground Level Doors/4 Bathrooms

• Solar Lighting

• Bonus Unfinished Mezzanine

• Dock High Possible

• Glass Kiln/Oven

• Close to 110, 405, 91 and 105 Freeways

Available : ±1,800 – ±6,600 

Lot Size: ±40,847 SF of Land

Zoning: C-P (PCD)

APN: 8447-031-038

Park-like setting: The building is situated in a serene environment with beautiful views of the park.

Ample parking: Large lot with ±28 Parking Spaces

Next to 10 Freeway with close access to 57, 71, 210 & 60 Freeway

AVAILABLE: ±27,750 SF Bldg on ±77,145 SF Lot

SALE PRICE: Negotiable

LEASE RATE: Negotiable

OPEX: $0.16 / SF

APN#: 7102-020-001

ZONING: M2

• Owner Motivated - Submit Your Offer Now!

• Large Fenced and Paved Gated Yard

• Abundant Parking – 56 spaces

• Two (2) Dock High Loading Doors

• Free Standing Building

• High Visibility

• Close to 91 & 710 Freeways

Available: ±182,746 SF / ±4.2 acres of 

LandSale Price: $9,685,538.00/ $53.00 PSF

Lease Rate: $70,000.00 Net per month

Zoning: Commercial Automotive

APNs: 7315-012-002, & 7315-012-804

• Carson Auto Row

• Close to SCE Hinson Substation

• Potential EV Charging Station

• Low Business License Fees & Utility Taxes

• Freeway Visibility: ±310,000 Average DailyVolume

• For Permitted Uses, Click Here

PROPERTY HIGHLIGHTS

Sold Suite Suite 18-C

Total Area Sold ± 3,444 SF

• Brand New Construction

• 28’ High Clearance

• M1 Zoning

• Highly Desirable Business Park Setting

• Great Inland Empire West Location

• Close to 10, 71 & 60 Freeways

• Demand for industrial space declined for the tenth consecutive quarter in Q2 2025.
• Vacancy rate increased to 6.1%, up from a record low of 1.8% in late 2022.
• Higher vacancy rates have led to improved market conditions for tenants, with rental rates dropping over 10% from their recent peak.
• Reduced demand is primarily driven by concerns over tariff impacts, contributing to decreased cargo volumes at the Los Angeles port complex.
• Year-over-year container traffic in May 2025 fell by 5% at the Port of Los Angeles and by 8.2% at the Port of Long Beach.
• Rising vacancies are fostering a more balanced industrial market.
• The overall vacancy rate reached 6.1% at the end of June 2025, the highest since 2012.

South Bay Submarket Q2 2025 Overview Summary

• Vacancy/Availability: Total vacancy hit 6.4%, the highest since early 2023, with a 70-basis-point quarterly rise; available space reached 19.4 million square feet, up 2.5 million SF since Q4 2024, driven by returning leased properties and slow lease-ups; sublet vacancy rose to 1.0%, hinting at tenant downsizing; absorbing 4.8 million SF is needed to reach a 4% vacancy rate, excluding new deliveries.
• Rental Rates: Asking rents softened to $1.54 NNN per square foot from $1.61 in Q1 and a $1.69 peak in Q2 2024, marking two consecutive quarterly declines since the pandemic recovery; direct rents dropped more than sublet rents, reflecting landlord pressure from rising vacancies and slow leasing; despite high historical levels, tenants are gaining negotiation leverage.
• Construction: Only one building (504,000 SF) was delivered, with the pipeline shrinking to 742,000 SF, down 60% from 1.9 million SF a year ago, due to caution over vacancies, slow leasing, and softening rents; graded sites are on standby awaiting tenants or better conditions; no preleased projects suggest rising vacancy risks if leasing doesn’t improve.
• Leasing Activity/Absorption: Negative net absorption of -1.15 million SF marked a downturn from 544,000 SF last quarter, the third negative quarter in four, indicating tenant contraction; leasing activity fell to 1.12 million SF leased and 84 deals, below the 105-deal historical average, reflecting occupier caution, especially for larger spaces.
• Sales Activity/Investment Trends: Sales totaled 19 transactions at $93.5 million, up from 16 in Q1 but far below $375 million in Q4 2024; the average price per square foot dropped to $211.83, the lowest in over a year, as buyers adjust to vacancies and rents; cautious investor sentiment persists due to delayed Fed rate cuts and tariff uncertainty, though strong fundamentals attract future capital.

The South Bay industrial market faces challenges with rising vacancies, softening rents, and reduced activity, tempered by potential for recovery as market conditions stabilize.

Midcounties, Central, Inland Empire Submarkets also included in report

AVAILABLE: ±25,660 SF of Land

ASKING RATE: $0.33 / SF Gross

ZONING: I2

TERM: 3-5 Years

• Block Wall

• Paved Yard

• Power and Water Available

• Office Trailer

• Close to 60, 71 and 10 Freeways

AVAILABLE: ±27,896 SF(±0.64 Acres) of Land

ASKING RATE: $7,532 ($0.27 PSF Gross) Per Month

• Short Term Lease

• Truck Parking Possible

• Fenced Yard with Aggregate

• Water/Power Possible

• Close to 10 and 210 Freeways

AVAILABLE: ±27,750 SF Bldg on ±77,145 SF Lot

$0.16 OPEX

APN#: 7102-020-001

ZONING: M2

• Owner Motivated - Submit Your Offer Now!

• Large Fenced and Paved Gated Yard

• Abundant Parking – 56 spaces

• Two (2) Dock High Loading Doors

• Free Standing Building

• High Visibility

• Close to 91 & 710 Freeways