Sterling Q2 2026 Commercial Real Estate Performance and Q3 2026 Outlook
Executive Summary
Q2 did not deliver a clean, broad based recovery in U.S. commercial real estate. It delivered something more useful for lenders and investors: a very clear sorting mechanism. Where supply is tight, development has already slowed, and the debt market can underwrite real cash flow instead of a story, fundamentals are improving faster than the market narrative suggests. Where supply is still heavy, concessions are doing the real work, and refinancing still depends on optimistic rent assumptions, the rebound remains fragile. That is the core message across 1 to 4 investor lending, multifamily, office, and industrial.
The contrarian read is straightforward. The better relative value in Q3 and into year end is not in the obvious Sun Belt growth trade. It is in supply constrained gateways and a handful of lower drama Midwest markets. New York, San Francisco, Boston, and Chicago look better on a risk adjusted basis than many investors expected six months ago, not because they are booming, but because supply is lighter, top tier liquidity is returning first, and tenants are paying up for quality. By contrast, Dallas Fort Worth, Phoenix, Denver, and parts of Atlanta and Houston still have too much new product to work through in apartments, industrial, or both.
That same logic carries into the lending stack. In small balance residential investor credit, DSCR looks strongest, fix and flip has gotten better but not easy, and speculative ground up 1 to 4 looks the weakest of the three. Velocity said financing demand stayed strong in Q1 across traditional commercial and 1 to 4 rental property loans, while Redwood’s CoreVest funded $432 million of loans in Q1 but leaned more cautiously into late quarter volatility. Meanwhile, ATTOM showed flip margins improved to 25.4 percent in Q1, yet flip volume remained below both the prior quarter and the prior year. New residential construction data looked worse for ground up: single family starts fell to an annualized 882,000 in May, and 2 to 4 unit starts were down 29.4 percent year to date on a non seasonally adjusted basis. Builder sentiment also stayed weak, with 35 percent of builders cutting prices in June and 62 percent using incentives.
The practical outlook for Q3 is selective compression in cap rates for quality assets, not a general repricing rally. CBRE’s latest cap rate survey said cap rates were steady in late 2025 and that most respondents believed cyclical peaks in yields were behind the market, while CBRE’s Q1 office report showed higher permanent loan LTVs and improving investor appetite for high quality office. But the refinancing wall is still large at $875 billion of commercial and multifamily maturities in 2026, and office stress remains very real, with Trepp showing office CMBS delinquency at a record 12.34 percent in January and still 11.53 percent in May. This is why the rest of 2026 looks like a lender’s market in debt, but not yet a blanket buyer’s market in equity.
Contrarian Thesis
The market is still priced as if growth geography will beat supply geography. In Q2, the data increasingly said the opposite. The strongest setup is where supply has already been choked off and demand only needs to be decent, not heroic. The weakest setup is where investors are still underwriting to demographic momentum while ignoring the fact that net operating income has to fight through too much new inventory, too many concessions, and too many loans that now need fresh equity. That is why the next leg of recovery is more likely to show up first in Manhattan office debt, San Francisco office recapitalizations, Boston and New York apartments, and Chicago multifamily than in the crowded consensus trades across parts of the Sun Belt.
The second leg of the thesis is that the 2026 maturity wall is not simply a distress event. It is a transfer event. MBA estimates that 17 percent of the $5.0 trillion commercial and multifamily mortgage universe, or $875 billion, matures this year. FDIC data still show loan growth continuing, including nonfarm nonresidential CRE growth at community banks, which means credit has not vanished. At the same time, FDIC’s 2026 Risk Review shows past due and nonaccrual rates for non owner occupied CRE and multifamily remain above pre pandemic averages, while Reuters reported private credit fundraising and lending flows slowed in early 2026. Put together, that means capital is available, but it is choosier, more expensive, and more structurally advantaged than in prior cycles. That is good for disciplined lenders and private credit. It is not good for owners who still need 2021 valuations.
That also explains why office should be treated less like a dead sector and more like a barbell. National office data are no longer uniformly deteriorating. CBRE reported eight straight quarters of positive net absorption, leasing nearing 2019 levels, overall vacancy down to 18.6 percent in Q1, and prime vacancy down to 12.7 percent, with Midtown Manhattan prime vacancy at just 2.9 percent. Yardi’s June office outlook showed national vacancy down to 17.6 percent in May and office investment volume at $23 billion year to date through May, led by Manhattan at $3.7 billion and San Francisco at $2.3 billion. But Trepp’s office delinquency data make clear that the weak tail is still getting worse. So the right trade is not “office yes” or “office no.” It is “good office debt and recapitalizations yes, commodity office and aging CBD exposure no.”
Investor 1 to 4 Credit
The cleanest pocket in 1 to 4 investor credit is DSCR. The reason is less about enthusiasm and more about cash flow visibility. Velocity’s first quarter results showed $639.4 million of production, a held for investment NPL ratio that improved to 10.1 percent from 10.8 percent, and management saying demand remained strong in both traditional commercial and 1 to 4 rental property markets. Redwood’s CoreVest business funded $432 million in Q1, with 39 percent term and 61 percent bridge, while distribution volume rose 19 percent from the prior quarter even as management adopted more pipeline discipline late in the quarter. The message from public lenders is that there is still real borrower demand and functioning capital markets for income backed investor loans, but the market is rewarding lenders who can hold discipline on pricing and execution.
Fix and flip is better than the macro mood suggests, but it is not a volume story yet. ATTOM reported 64,348 flipped homes in Q1, equal to 8 percent of sales. That share was up from the prior quarter, and the typical gross return improved to 25.4 percent with gross profits rising to $66,000. But flips were still down from both Q4 2025 and Q1 2025. That is a useful signal. Margins have stopped getting worse, which matters for lenders. Volume has not meaningfully reaccelerated, which also matters. In other words, fix and flip is no longer a falling knife, but it still works best for borrowers who can source basis, manage time, and exit quickly. That is healthier for lenders than a speculative rush back into the product.
Ground up 1 to 4 is the weakest of the three because it is being squeezed from both ends. On the cost side, Reuters and NAHB both pointed to persistent pressure from rates, construction costs, and imported materials. On the volume side, the Census and HUD release for May showed total starts down 15.4 percent month over month, single family starts down to 882,000 annualized, and 2 to 4 unit starts at a very low run rate, with year to date 2 to 4 starts down 29.4 percent. Builder sentiment in June remained weak, and builder incentives stayed elevated. That does not mean ground up goes away. It means the product becomes a location and sponsor selection business rather than a broad credit push.
The channel implication for Sterling style lenders is fairly clear. DSCR should remain the anchor allocation because it benefits from rental demand, provides a natural takeout for successful transitional borrowers, and does not require the same degree of construction cost heroics. Fix and flip should stay open, but with stronger draw controls, narrower geography, and more skepticism around elongated timelines. Ground up 1 to 4 should be the smallest sleeve and should focus on infill, affordable price points, and submarkets where resale inventory is still genuinely scarce. The biggest mistake in the second half of 2026 would be treating those three products as if they are expressing the same macro view. They are not.
Sector Views
Multifamily
Multifamily is improving nationally, but the recovery is highly uneven. CBRE said Q1 was a turning point, with net absorption of 78,100 units, vacancies falling 20 basis points quarter over quarter to 4.8 percent, and completions down 30 percent year over year to 58,100 units. Net absorption exceeded completions for the first time since Q2 2025. That matters because the supply shock that broke rent growth is finally fading. Still, the rent line is only just beginning to heal. CBRE put national rents up 0.2 percent year over year in Q1, while Yardi showed the national advertised rent up only 0.1 percent in March and 0.3 percent month over month in May after a very weak 2025.
The contrarian edge is to own or lend where supply was always the real constraint. Yardi’s March and May numbers showed New York City, San Francisco, and Chicago among the strongest rent growth markets, while Dallas, Phoenix, and Denver stayed negative. Miami occupancy remained healthy at 95.2 percent, but that market is not really contrarian anymore because the good news is already reflected in pricing. Chicago is more interesting: it keeps showing up near the top of rent growth tables without the same development overhang seen in the Sun Belt. Boston and New York also fit the “less sexy, more durable” pattern.
NOI trends follow that map. In supply light markets, occupancies are already firm enough that small rent gains can flow into revenue. In supply heavy markets, the published rent number can still flatter reality because concessions do more of the work. That makes Phoenix, Denver, and Dallas more dangerous than headline migration narratives imply. The right read for Q3 is that multifamily is investable again, but mostly in markets where 2024 and 2025 deliveries already did their damage and new starts are now falling.
Office
Office is still the hardest sector to own blindly, but it is getting easier to underwrite selectively. CBRE’s Q1 report showed 6.9 million square feet of net absorption, the highest Q1 since 2020, and leasing activity of 56.2 million square feet, with annual leasing on track to surpass 2019. The overall vacancy rate fell to 18.6 percent and prime vacancy to 12.7 percent. Yardi’s June report pushed the national vacancy figure lower still, to 17.6 percent in May, and highlighted Manhattan at 13.1 percent and San Francisco at 23.3 percent after a 520 basis point improvement from the peak.
Two things can be true at the same time. Office fundamentals are better than the public narrative, and office credit stress is still severe. Trepp said office CMBS delinquency hit a record 12.34 percent in January. By May, office delinquency had eased to 11.53 percent, but that is still extremely high. Special servicing was also elevated, at 10.86 percent in May after hitting 11.38 percent in April. The problem is concentrated in large, legacy, often lower quality assets. Trepp specifically noted how single large New York office loans could move the sector rate. That is why trophy Manhattan and selected San Francisco assets can finance while distressed Times Square, SoHo, or older CBD loans are still showing up in delinquency pipelines.
The best relative office markets now are the ones where top tier inventory is scarce and the pipeline is low. Manhattan has rents near $69 per square foot, vacancy at 13.1 percent, a prime vacancy rate in Midtown of 2.9 percent, and nearly $3 billion of office sales through April in Yardi’s city data. San Francisco still has high vacancy, but it is improving faster than almost anywhere in the country, with the city at 23.3 percent after a sharp year over year decline and investment volume second nationally through May in Yardi’s national report. Boston looks closer to bottoming than still repricing, even if parts of the lab and office market remain under pressure. Chicago is less glamorous but more stable than feared. Seattle and much of commodity West Coast office remain challenging.
Industrial
Industrial is no longer a simple “buy anything with loading docks” trade. It is stable nationally, but it is no longer universally landlord friendly. CBRE reported Q1 leasing up 14 percent year over year to 249.8 million square feet, with net absorption rebounding to 43.1 million. Cushman and Wakefield also showed solid big box leasing and said national vacancy likely moved past its cyclical peak in Q1. Yardi, which runs a somewhat looser vacancy series, showed a national industrial vacancy rate of 9.1 percent in April and called lease pricing more tenant friendly in several major markets. All three messages point in the same direction: demand is decent, but pricing power has faded where development remained aggressive.
This is where the contrarian view matters most. Dallas still leads the country in construction with 28.6 million square feet under way, Phoenix has 19.4 million, and Houston has 21.0 million, according to Yardi. Atlanta continues to lead rent growth nationally, but that strength exists alongside a large industrial pipeline. In other words, the best industrial debt opportunities may still be in those markets because they have liquidity and tenant demand, but the best equity opportunities are not necessarily there. In a market where new lease premiums are narrowing and some new leases are now below in place averages, the owner with genuine basis is in a very different position from the owner who bought late cycle or built speculative product with a thin spread.
Market Map Across Major Cities
The city map below uses the provided Q2 baseline as the working market table and keeps “unspecified” where city level public data are not refreshed consistently. The broad interpretation is that New York, San Francisco, Boston, and Chicago look earlier in recovery than consensus, while Dallas Fort Worth, Phoenix, Denver, and Seattle remain more burdened by supply, commodity space, or both. Miami is operationally strong but less obviously mispriced, while Atlanta and Houston remain selective underwriting markets rather than clean overweights. That reading is consistent with CBRE, Yardi, and Trepp data through late June.
Key U.S. Markets: What the Data Is Actually Saying
The story is not simply Sun Belt growth versus coastal distress. Q2 showed a more complicated market. Liquidity improved in select coastal markets, apartment weakness remained visible across several high growth metros, and office recovery continued to split sharply by asset quality, submarket and debt basis.
New York City
Signal: Trophy assets are attracting capital, while weaker mixed use and CBD loans remain stressed.
- Manhattan office sales near $3.7B YTD through May
- Multifamily rents up 3.3% year over year in May
- Manhattan office vacancy at 13.63%
San Francisco
Signal: Still distressed on the surface, but liquidity and rent resilience are better than the consensus view.
- Office sales near $2.3B YTD through May
- Multifamily rents up 4.5% year over year
- Office vacancy down 520 bps year over year
Los Angeles
Signal: The market may be bottoming, but office recovery remains slower than stronger coastal peers.
- Office sales near $752M YTD through May
- Office rents up 6.58% year over year
- Office vacancy around 14%
Chicago
Signal: Boring may outperform. Supply pressure is lower and apartment fundamentals are improving.
- Office sales near $826M YTD through May
- Multifamily rents up 3.5% year over year
- Office vacancy around 18.1%
Dallas Fort Worth
Signal: Liquidity remains deep, but apartments and industrial are both dealing with excess supply.
- Office sales near $1.4B YTD through May
- Multifamily rents down 2.7% year over year
- Office availability at 28.5% in Q1
Houston
Signal: More cyclical than the market sometimes prices, with office bifurcation and pauses in new supply.
- 2025 office sales near $2.3B
- Multifamily rents down 1.2% year over year
- Office vacancy remains above national averages
Atlanta
Signal: Still attractive long term, but current supply and vacancy require sharper underwriting.
- 2025 office sales near $1.2B
- Office rents around $37 per SF
- Office vacancy around 20.9%
Miami
Signal: Operationally strong, but pricing already reflects much of the positive story.
- Office sales near $873M YTD through May
- Office asking rents above $58 per SF
- Multifamily occupancy around 95.2%
Phoenix
Signal: One of the clearest cases where the growth story is stronger than the near term data.
- Office sales near $521M YTD through May
- Multifamily rents down 3.2% year over year
- Office vacancy around 16.4%
Denver
Signal: Still digesting apartment supply and weaker office fundamentals.
- Office sales above $300M through April
- Multifamily rents down 3.6% year over year
- Office vacancy above 21% city level
Seattle
Signal: Deep CBD value destruction remains visible, especially across weaker office assets.
- 2025 office sales near $185M
- Multifamily rents down 0.9% year over year
- Office vacancy above 25% in metro data
Boston
Signal: Office and lab weakness remain, but pricing looks closer to bottoming than widening further.
- Office sales near $483M YTD through May
- Office rents above $66 per SF
- Office vacancy around 13.77%
Outlook and Trade Ideas
The highest conviction Q3 call is to lean into dispersion rather than chase beta. For lenders, that means favoring cash flow backed multifamily in New York, Boston, and Chicago; selective DSCR in landlord friendly rental markets; and high quality office debt in Manhattan and San Francisco where leasing, rent, and liquidity are all improving at the same time. For investors, it means looking harder at recapitalizations and rescue preferred in gateway office rather than paying full prices for already loved Miami assets or trying to force early equity upside in oversupplied Sun Belt multifamily. For private credit, the best trade is the maturity wall itself, especially where banks want to reduce exposure but the underlying asset still has a real leasing story.
In multifamily, the best setup into year end is in markets where the delivery wave is now fading and rent growth has already turned positive. New York, Chicago, and Boston fit that profile. Miami still works operationally but not as a deep value trade. Dallas, Phoenix, and Denver are the places to be patient or lend lower in the stack only if the sponsor brings real equity. The logic here is simple: national multifamily has already crossed the important threshold where absorption exceeds completions, but local NOI will only recover cleanly where concessions start to burn off.
In office, the best trade is in debt and structured capital, not broad common equity. Manhattan and San Francisco now have enough evidence of leasing demand, price resilience at the top end, and declining vacancy to justify selective risk. Boston belongs in that same conversation. Chicago is interesting for investors who want stability and lower basis rather than glamour. Seattle still needs more time. The wrong trade is assuming a few headline trophy refinancings mean the sector is healed. They mean the best buildings are financeable again. That is not the same thing.
In industrial, the better stance is neutral to selective. National leasing is healthy enough to keep the sector from rolling over, but there is not enough scarcity in several major Sun Belt markets to underwrite easy cap rate tightening. Dallas, Houston, and Phoenix remain good lending markets because liquidity is deep and tenant demand exists, but the equity trade is more basis sensitive than it was two years ago. Atlanta remains strong operationally, yet its large pipeline is a reminder that rent growth and supply can cut against each other.
How the Recovery Could Sequence From Here
Q2 earnings and lender updates reset valuation expectations.
Lower deliveries begin to help gateway multifamily and selected office markets.
Refi activity rises as maturities collide with selective lender appetite.
Cap rates compress first for best in class assets.
Distress remains concentrated in older office and oversupplied Sun Belt product.
Winners are markets with low pipeline, improving occupancy, and realistic debt sizing.
Risks and Sensitivities
The biggest risk to this view is rates. If Treasury volatility stays high or moves higher again, the selective cap rate compression case gets delayed. CBRE’s cap rate survey made clear that most of the market believes peak yields are behind us, but it did not say compression would be broad or immediate. A higher for longer backdrop would not break the relative value case for supply constrained markets, but it would slow transaction velocity and widen the gap between debt and equity execution.
The second risk is that supply heavy markets heal faster than expected because absorption surprises to the upside. That can happen, especially in apartments where starts have already fallen and some high supply markets are showing better month to month rent momentum. But the base case still favors caution because negative year over year rent prints in Dallas, Phoenix, and Denver have not fully cleared, and industrial pipelines in Dallas, Phoenix, Houston, and Atlanta remain large enough to keep tenants in control in many submarkets.
The third risk is credit transmission. If private credit really does slow harder than expected while banks stay defensive, the maturity wall becomes more disorderly. Reuters already noted that private credit fundraising and lending flows cooled in early 2026, and FDIC data still show elevated problem indicators in non owner occupied CRE and multifamily versus pre pandemic norms. That would hit weaker sponsors first, especially in office and in any market where NOI is still being sustained by concessions rather than rent growth.
Even with those risks, the core thesis still holds. Q2 2026 did not prove that all of CRE is back. It showed that the next recovery phase will be narrower, more local, and much more basis driven than the last one. That is exactly why there is opportunity. When the market tells the same simple story about every property type and every city, it usually misses the trade. Right now the trade is dispersion.
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Disclaimer
This research essay is provided for informational purposes only. It does not constitute investment advice, investment research for the purposes of any securities laws, a recommendation, or an offer or solicitation to buy or sell any security, strategy, or financial product. The views expressed are as of the date of publication and are subject to change without notice.
The analysis contains forward-looking statements and scenario estimates based on the author’s judgment and stated assumptions. Actual outcomes may differ materially due to changes in geopolitical conditions, policy responses, market liquidity, and other factors. Any quantitative projections are illustrative stress-testing ranges, not predictions.
Information is drawn from sources believed to be reliable (including official agencies and international organizations), but accuracy and completeness are not guaranteed. Past performance and historical relationships are not indicative of future results. Investing involves risk, including the possible loss of principal.