By mid 2025, the commercial real estate (CRE) market is still feeling the weight of higher base interest rates, which have pushed up borrowing costs across nearly every asset class. Whats notable is that capitalization rates haven’t moved upward at the same pace. The result is a shrinking spread between cap rates and interest rates; most evident in the multifamily and industrial segments, two areas that traditionally show strong fundamentals. This tightening has led to more frequent cases of “negative leverage,” where the cost of debt exceeds the return on the asset.

In these conditions, investors lean more heavily on property performance and net operating income (NOI) growth to justify acquisitions, hoping spreads eventually normalize. The challenge is that inflationary pressures remain stubborn, and the market has largely accepted the idea of a “higher-for-longer” rate environment. Unless there are meaningful macroeconomic changes , spreads are unlikely to shift quickly.

Still, data through April 2025 shows the trend may be easing. The share of transactions marked by negative leverage has begun to taper off, hinting at either reduced investor appetite or adjusted pricing expectations. Supporting this , cap rate and interest-rate spread figures show early signs of stabilizing.

Market sentiment has also shifted with expectations for monetary policy. As of June 2025, CME Group data reflects a 65% chance of at least two rate cuts before year-end, a view fueled by weaker GDP forecasts and adjustments in trade policy. If those cuts arrive, they could relieve some of the pressure by lowering financing costs and widening spreads back toward healthier levels.

In short, negative leverage remains a headwind, but there are indications the market is finding its footing. Should monetary easing take place later in 2025, it could mark the start of a more balanced relationship between borrowing and investment returns.

When evaluating the financial stability of companies or governments, credit ratings play a key role. These ratings are assigned by four major credit rating agencies: Moody’s , Standard & Poor’s (S&P), Fitch, and DBRS. Each agency assesses the ability of a borrower to meet their debt obligations and publishes ratings to reflect that assesment for both long-term and short-term debt.

These ratings are generally grouped into categories or “tiers,” ranging from the most reliable known as “Prime” to “In Default” , which indicates a failure to meet obligations. A top-tier rating such as Aaa from Moody’s, AAA from S&P and Fitch, or R-1H from DBRS signals the borrower has a very strong capacity to repay debt.

Beneath the Prime level are other Investment Grade tiers, including High Grade, Upper Medium Grade, and Lower Medium Grade. These categories represent borrowers with solid credit standing and relatively low credit risk.

Anything below Investment Grade falls into Non-Investment Grade, often referred to as “junk” or “speculative” debt. Ratings like Ba (Moody’s) or BB (S&P, Fitch, DBRS) imply higher risk, but also potentially higher returns. As the credit outlook worsens, the ratings descend through Speculative, Substantial Risk, and eventually to Default. The lowest ratings like Ca or C from Moody’s and D from the others indicate serious trouble in repaying debt.

Each agency has its own system:

Moody’s uses a numerical system (e.g., Aa1, Aa2)

S&P and Fitch rely on letter grades with plus/minus signs (e.g., AA+, AA, AA−)

DBRS blends letters with terms like “high” or “low” (e.g., A (high), BBB (low))

Short-term credit ratings, which assess obligations due within a year, also differ across agencies. For example, Moody’s assigns P-1 to its highest short-term rating, while S&P starts with A-1+ and descends from there.

A comparative table often helps visualize how the agencies’ ratings align. These charts, usually color-coded from green (lowest risk) to red (default), are useful tools for investors, risk managers, and financial analysts who want to gauge the relative risk of bonds or other debt instruments.

Overview

The 2025 Industrial Market Pulse report encapsulates the perspectives of 118 industrial real estate brokers from 47 Lee & Associates offices across the U.S. and Canada. The survey, conducted in May 2025, explores brokers’ outlooks on industrial market trends, tenant behavior, leasing activity, and shifting space requirements. Overall, it portrays a cautiously optimistic yet tenant-driven market environment.

General Market Sentiment

The brokers’ sentiment can be described as “cautiously optimistic.” While economic and political uncertainty ,particularly tariff-related issues, has prompted some tenants to pause major decisions, most brokers still expect stable market performance over the next 6–12 months. A key theme throughout the findings is cost sensitivity, with tenants pushing back against rising lease expenses and expecting more concessions from landlords.

The tenant sentiment, as captured in the report, is cautious and steady. Tenants are generally risk-averse, opting to delay decisions amid uncertainties. This translates into heightened pressure on landlords to remain flexible and competitive.

Leasing and Tenant Trends

One of the most critical takeaways is that the industrial leasing landscape has shifted decisively toward tenants. The size of the space significantly affects market leverage. Tenants with requirements in certain size ranges are encountering more options, enabling them to negotiate for lower rents, improved concessions, and shorter lease terms .

The survey highlights five key shifts in tenant behavior:

1. 58.5% of brokers observed a greater sensitivity to rental rates and operating expenses.
2. 48.3% reported that tenants now expect more generous tenant improvement (TI) packages and concessions.
3. 46.7% noted downsizing and demand for smaller footprints.
4. 44.1 % indicated a preference for shorter lease durations
5. 24.6% observed increased interest in second-generation or Class B/C spaces at discounted rates.

Lease Rate Outlook

Expectations for lease rate movements are mixed but conservative:

• 34.5% of respondents foresee an increase.
• 31.9% believe rates will stay flat
• 26.7% predict a decline.
• 6.9% consider the market too unpredictable to forecast accurately.

This distribution reinforces the broader narrative of minimal growth or stagnation in lease rates, reflecting the broader caution pervading the market.

Regional Insights

The report also breaks down sentiment by region:

• West: Demand persists, but cost concerns are rising.
• Southwest: Tenants are downsizing, and flexibility is more valued.
• Midwest: Shows a steady outlook with modest confidence among landlords.
• Southeast: Cautious growth with a preference for shorter leases.
• Northeast: Incentives are increasing to keep up with active demand.

These regional nuances highlight localized dynamics but maintain the overarching themes of tenant leverage and landlord concession.

Conclusion

The 2025 Industrial Market Pulse underscores a market navigating cautious optimism tempered by economic uncertainties and tenant-driven dynamics. While brokers remain hopeful about the coming months, they are keenly aware of shifts in power dynamics favoring tenants; prompting landlords to adapt through pricing flexibility, shorter lease structures, and added incentives. This report is not only a snapshot of present conditions but also a guide to navigating the evolving industrial real estate landscape.

Investing in Commercial Real Estate in Fullerton, CA: Why Now Is a Smart Move

If you’ve been considering expanding your investment portfolio, commercial real estate in Fullerton, California presents a compelling opportunity. From retail spaces to mixed-use developments, this dynamic Orange County city offers strong fundamentals for long-term growth and immediate returns.

Why Fullerton?

Located in northern Orange County, Fullerton is more than just a college town. With a population of over 140,000 and home to institutions like California State University, Fullerton (CSUF), the city enjoys a constant flow of traffic, business, and cultural activity.

1. Strong Economic Growth

Fullerton boasts a diversified economy with a healthy mix of education, healthcare, manufacturing, and retail. This economic diversity provides stability for commercial tenants — a key factor for real estate investors.

• Job growth is steady
• Low commercial vacancy rates
• Ongoing city development projects

2. Demand for Retail and Office Space

The revitalization of Downtown Fullerton has sparked demand for retail and mixed-use space. Trendy restaurants, coffee shops, and boutiques attract locals and students alike.

At the same time, flexible office spaces are increasingly attractive to startups and small businesses seeking proximity to Los Angeles without LA prices.

3. Development-Friendly Zoning

The City of Fullerton offers investor-friendly zoning policies, particularly in transit-oriented and mixed-use areas. These allow for adaptive reuse, vertical development, and increased density — ideal for modern investors looking for value-add opportunities.

4. Long-Term Value & Appreciation

Orange County continues to be one of the most competitive markets in Southern California. Fullerton’s affordable entry point relative to nearby cities makes it a strategic location for long-term appreciation.

What Investors Are Saying

“I’ve helped several clients acquire multi-tenant buildings in Fullerton over the past 2 years,” says Mark Larson, local real estate advisor. “With strong tenant retention and city support for commercial development, the ROI potential here is impressive.”

5. Opportunities in Underutilized Properties

Many older properties in Fullerton are ripe for renovation, repurposing, or redevelopment. Investors willing to modernize buildings or convert space can unlock significant equity and rental income potential.

Available Hotspots for Investment

• Retail / Restaurant in Downtown Fullerton – Foot traffic, nightlife, mixed-use buildings – Link -> Freestanding ±3,369 SF retail/restaurant building for sale in Downtown Fullerton – marklarsoncre.com
• Three buildings with strong tenants, parking, and excellent visibility.– Commercial and office zoning – Link -> Industrial/flex property for sale in Fullerton, CA. ±38,646 SF across three buildings with strong tenants, parking, and excellent visibility. – marklarsoncre.com
• Apartment Homes in Fullerton California – SOLD -> Link -> Las Palmas Apartment Homes in Fullerton California – marklarsoncre.com

Final Thoughts

Whether you’re a seasoned investor or exploring your first commercial property, Fullerton offers the perfect mix of stability, growth potential, and community support. If you’re ready to take the next step, reach out today — I’d be happy to show you available listings and opportunities tailored to your goals.

The State of Commercial Real Estate in Orange County: Market Trends & Insights

Orange County’s commercial real estate market continues to be a dynamic and evolving landscape, shaped by economic trends, shifting business demands, and investor confidence. As a premier location for businesses and commercial investors, Orange County offers unique opportunities across various sectors, including office space, industrial properties, and retail developments.

Current Market Trends

1. Office Space Recovery and Adaptation

The office sector in Orange County has faced significant changes in recent years due to hybrid work models and evolving corporate needs. While demand for traditional office spaces has softened, there is a noticeable shift toward flexible, high-quality work environments that emphasize collaboration and amenities. Areas like Irvine and Newport Beach continue to attract companies looking for premium office spaces with modern layouts and convenient access to transit hubs.

2. Industrial Boom Continues

Industrial real estate remains a hot commodity in Orange County, with high demand from e-commerce, logistics, and manufacturing sectors. The rise of online shopping has fueled the need for distribution centers and warehouse space, driving vacancy rates to record lows. Cities such as Anaheim, Santa Ana, and Costa Mesa have seen a surge in industrial developments, with rental rates climbing steadily due to limited supply.

3. Retail Resilience and Transformation

Despite economic uncertainties, retail real estate in Orange County has shown resilience, particularly in high-traffic and affluent areas. The shift toward experiential retail—such as dining, entertainment, and boutique shopping—has helped brick-and-mortar businesses stay competitive. Popular destinations like South Coast Plaza and Fashion Island continue to draw both local consumers and tourists, ensuring strong leasing activity in premium retail spaces.

Investment Insights

1. High Demand for Mixed-Use Developments

Investors are increasingly looking at mixed-use developments that blend residential, commercial, and entertainment spaces. These projects cater to the growing demand for walkable, live-work-play environments, making them attractive options for developers and investors alike.

2. Rising Interest Rates and Their Impact

With fluctuating interest rates, commercial real estate financing has become more complex. Investors are navigating these changes by seeking creative financing solutions, focusing on value-add properties, and adapting to shifting market conditions.

3. Emerging Submarkets to Watch

While established areas like Irvine and Newport Beach remain prime investment locations, emerging submarkets such as Tustin, Costa Mesa, and Huntington Beach are drawing increased attention. These areas offer lower entry costs while still benefiting from Orange County’s strong economic foundation.

Looking Ahead

As Orange County’s commercial real estate market evolves, staying ahead of trends and understanding key investment strategies will be crucial for success. Whether you are an investor, business owner, or developer, the right market insights can help you navigate opportunities and make informed decisions.

For expert guidance in Orange County’s commercial real estate landscape, reach out to Mark Larson, a seasoned broker with deep market expertise and a commitment to helping clients achieve their real estate goals.