🏅 5 small office markets leading the recovery

👋 Happy Sunday, Best Ever readers!

In today’s newsletter, small markets defy the office slowdown, the CRE market softens, multifamily optimism returns, an investor learns the hard way, and much more.

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Let’s CRE!

🗞️ NO-FLUFF NEWS
CRE HEADLINES

📊 Pipeline Growth: Multifamily supply forecast raised 6.8% to 584,875 units for 2025, with 2027 jumping 12.8% to 406,757 units. Year-to-date construction starts total 207,847 units, up 4.5% over 2024 as the pipeline remains deep at 969,000 units.

📉 Market Softens: NMHC's Market Tightness Index has fallen to 31, well below the breakeven level of 50, indicating lower rent growth and higher vacancies. The Debt Financing Index has hit 78 as improved borrowing conditions drove the Sales Volume Index to 59 for the third consecutive quarter.

📈 Affordable Surge: Affordable housing posted strong NOI growth as expenses rose just 2.3% through August while income climbed 3.7%, producing 5.6% NOI gains. Raleigh, Kansas City, Columbus, D.C., and Philadelphia all recorded double-digit NOI increases YTD.

💼 Extension Wave: CRE loan modifications reached $11.2 billion in Q3 as lenders extended terms to avoid defaults, with hotels accounting for $5.5 billion and offices $1.4 billion. Loans over $50 million made up 74% of total modified balances as "extend and pretend" strategies re-emerge.

🏢 Flex Expands: Coworking space now accounts for 2.1% of national office inventory, up 20 basis points YoY, with 8,420 locations totaling 152.2M SF. Chicago led growth at 2.6% while Miami topped all markets at 4.1% as hybrid work fuels flexible office demand.

🏆 TOP STORY
5 SMALL OFFICE MARKETS LEADING THE RECOVERY

While national office metrics stay sluggish, five smaller markets are quietly outperforming, posting positive absorption, falling vacancies, and rising rents even as larger metros struggle with stubborn fundamentals.

The trend signals a structural shift: Quality space in diversified local economies is outperforming legacy inventory in high-vacancy markets. Nearly half of tracked U.S. markets posted positive absorption in Q3, and Class A assets recorded 3M SF of net positive demand — the strongest quarterly total in three years.

Here are the five small markets leading the recovery:

• Nashville, TN: Gross absorption surpassed 1M SF in Q3, driven by healthcare and tech tenants favoring urban mixed-use locations. Class A space near downtown and The Gulch is achieving some of the Southeast's strongest rent growth, supported by limited new supply.

• Columbus, OH: Columbus posted positive absorption of 148,000 SF in Q3 as vacancy fell from 19% to 18.2%. Suburban submarkets like Dublin and Westerville led performance, with asking rents holding at $21.66 PSF. 

• Columbia, SC: YoY job growth ranked fifth nationally at 2.7% through August, pushing downtown rents toward $30 PSF. Class A lease rates are 25% above pre-pandemic benchmarks, driven by state agency demand and minimal speculative supply.

• Salt Lake City, UT: SLC maintained one of the healthier construction pipelines relative to inventory, supported by corporate investment and demographic growth. Tenant flight to prime locations has boosted occupancy and rent performance above national averages.

• San Diego, CA: Leasing activity ticked higher in Q3, with rising interest from life sciences, defense, and professional services firms. Modest rent appreciation is supported by limited deliveries and declining sublease volumes.

The common threads are diversified employment, limited new supply, and quality-driven tenant demand. With national office construction down over 50% YoY, well-located properties in these hubs are regaining their footing while oversupplied gateway markets remain stuck.

THE BOTTOM LINE

The office recovery isn't happening everywhere — it's concentrated in markets where supply discipline, employment growth, and quality inventory align. For investors, these five cities offer earlier entry points into stabilization than gateway markets still working through excess supply and high vacancy.

💰 CRE TRENDS
MULTIFAMILY OPTIMISM IS OFFICIALLY BACK

Multifamily buyer sentiment improved in Q3 as the Federal Reserve's first rate cut shifted expectations around pricing and transaction volume. According to CBRE's Q3 Multifamily Underwriting Survey, optimism is returning, particularly among value-add buyers and in Sun Belt markets.

• Core-asset buyers: 64% positive, up from 57% in Q2

• Value-add buyers: 70% positive, up from 62% in Q2

• Strongest improvement: Atlanta, Miami, and Nashville

Despite improved sentiment, underwriting assumptions held steady. Core going-in cap rates fell 2 bps to 4.73%, while exit cap rates dropped 1 bp to 4.95%. Core IRR targets remained at 7.70%.

From an underwriting perspective, a few key trends stand out: 

• Rent growth projections: 2.8% for core assets, 3.2% for value-add

• Value-add cap rates: Up 3 bps to 5.23%

• Value-add IRR targets: Compressed for the seventh consecutive quarter to 9.49%

Four markets — Atlanta, Miami, Nashville, and Seattle — saw cap rate compression for core assets.

Investment volume is expected to improve as the Fed continues cutting rates. Many investors have remained reluctant to sell despite high demand and narrowing bid-ask spreads, but more are expected to come to market in Q4 and 2026 as buyers access more attractive financing options.

🎉 BEST EVER CONFERENCE
ONE WEEK LEFT UNTIL PRICES INCREASE

Remember that thing you said you'd do "later"?

Tickets to the Best Ever Conference are going up November 1st. That means you have ONE WEEK left to secure your spot at the lowest prices of the year.

Why you should care:

• 95% of attendees closed a CRE deal in the past 9 months (these are YOUR people)

• Ski slopes + rooftop bars + off-market deals = the ultimate business trip

• Pure education, zero sales pitches. Just real insights from people who've actually done it.

What you should do right now: Lock in the lowest price we'll ever offer. Your future self will thank you.

P.S. Our exclusive hotel block at the Hyatt Regency is also filling up fast. Just saying.

🎙️ THE BEST EVER CRE SHOW
HOW AN $800K REHAB DISASTER TURNED INTO A WIN

Adam Craig joined Ash and Amanda on the Best Ever CRE Show this week to share his “worst ever” deal. After discovering a 25,000 SF building in Northeast Ohio, he did the math — $190,000 purchase price, one year to complete manageable rehab, expected rents of $20,000/mo. But the deal didn’t go down that way — in fact, it went awry quickly.

💰 The Vision: The building had solid bones and sat in a downtown location. Adam had been crushing single-family rehabs for years and had just transitioned to commercial. This would be his third commercial building—a chance to prove he could scale up. The 20,000 square feet of leasable space at $20K/month would be a cash flow machine.

⚠️ The Reality: Two deal-killing problems emerged: no elevator and no parking lot. ADA compliance became a nightmare. Suddenly, entire categories of potential tenants were off the table. The tenant pool shrank dramatically.

• Rehab costs ballooned to $800,000 — far beyond the original budget. The timeline stretched from one year to nearly two. And when Adam finally filled the building? He got $15,000 per month in rent, not the $20,000 he'd projected.

• "A lot of people told me they looked at that building and it was just too much work," Adam recalls. "They were probably right."

The Numbers:

• All-in Cost: $990,000 ($190K purchase + $800K rehab)

• Refinance Appraisal: $1.3 million

• Loan Amount: $805,000 at 7.4%

• Cash Out: Breakeven (got his money back, nothing extra)

• Monthly Cash Flow: $4,000-$5,000

After two years of grinding, Adam got his money back but no cash-out beyond that, though he did achieve $60,000/year in passive income going forward. He did a cost segregation study, it's in an opportunity zone (potential tax-free sale), and the mortgage pays down every year.

📣 "I'd probably buy it again because I learned so much rehabbing a 25,000-square-foot commercial building. But I also learned not to do it again."

🎙️ For more on this deal, and more, listen to Adam's full episode here.

🛠️ BEST EVER TOOLS
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