🔒Lower rates may spur commercial real estate activity in 2026, experts say

Connecticut commercial real estate experts say lower interest rates and shifting investor sentiment could make 2026 a more active year for the industry. Christopher Arnold, senior vice president overseeing commercial real estate lending at Liberty Bank, expects banks and insurance companies to increase the amounts they lend next year. Declining interest rates and falling U.S. Treasury bond yields are also poised to make commercial real estate more attractive relative to other investments, he said. “The forecast of commercial real estate in 2026 is supposed to be more dynamic, with more money chasing deals, both on the investor side and the lender side,” Arnold said.

He said investors already appear to be rotating toward real estate as interest rates tick down and stock valuations look less certain. “I think the equation over the next year is that the stock market is very frothy, bond yields will come down, and real estate becomes even more in vogue as an investor portfolio play,” Arnold said. Lower borrowing costs are also expected to make some development projects financially viable, allowing them to move forward, Arnold said. “I have customers that were not long ago borrowing at 7% to 8% levels, and are now borrowing in the 5% range,” Arnold said. “That produces windfalls for reinvestment. There is a powerful correlation between how well real estate does and where interest rates are.”

Multifamily strong, but shows warning signs

Arnold said apartment development remains robust, supported by Connecticut’s well-documented housing shortage. But he warned that the higher-end market is showing signs of saturation, as builders have added thousands of units in recent years. Some owners of newly built properties are now offering extended periods of free rent to secure tenants, he said. “We believe that the demand drivers are still good and that there continues to be kind of a housing shortage that needs to be addressed,” Arnold said. “That said, there has been a fair amount of higher-end inventory added that we have to monitor.” Connecticut has seen a notable increase in multifamily construction. Builders of projects with five units or more pulled permits for an average of 3,538 units annually from 2022 through 2024, compared with an average of 2,436 units per year from 2019 through 2021, according to U.S. Census Bureau data. Through the first eight months of 2025, builders pulled permits for 2,995 multifamily units, about a 53% increase from the year-ago period, Census data show.

Industrial construction slows, retail revival picks up

Industrial real estate remains relatively strong, but demand for new space has cooled, largely sidelining speculative development, Arnold said. He added that upgrading older industrial properties appears to be a more viable strategy. “The problem with industrial is the cost to construct is somewhat prohibitive against the economic benefit from the income stream,” Arnold said. “So, the cost-to-profit analysis is a little tough on new industrial today.” Retail, meanwhile, is showing renewed strength, Arnold said, offering lenders a potential counterweight to heavy multifamily exposure. Grocery-anchored plazas are outperforming big-box sites. “We are interested in adding good retail assets to the portfolio,” Arnold said. Office properties continue to lag statewide as tenants push for lower rents and larger fit-out concessions. Still, some submarkets are performing better, particularly areas such as West Hartford Center. “West Hartford attracts young people, and Connecticut is not known to be a destination for young people,” Arnold said. Some investors, he added, could look to Connecticut following the election of Democratic socialist Zohran Mamdani as mayor of New York, depending on how the new administration approaches rent policy. “If you’re a real estate investor, you’re going to look for alternatives where you’re not capped on what you can charge in rent,” Arnold said.

Leasing slowdown, labor shortages

Bryan Atherton, president of the Connecticut and Western Massachusetts Chapter of the Society of Industrial and Office Realtors, expects leasing to slow next year due to weakening employment conditions.

“Really, it’s the corporations that have not been hiring over the last six to 15 months over the anticipation of how AI is going to affect processes and the cost of doing business,” said Atherton, who also runs Newtown-based Atherton Real Estate Advisors. “The driver of the bus is employment, and the employment market is not as robust as you might believe.” Recent federal data point to growing softness in the labor market. The U.S. unemployment rate rose to 4.6% in November, its highest level in more than four years, and job growth remained modest following losses earlier in the fall. Atherton said vacancies are taking longer to fill and investment properties are beginning to sell at lower prices. Industrial users, he added, continue to face shortages of skilled labor such as CNC fabricators, limiting companies’ growth prospects. Atherton also pushed back against the idea that lenders will loosen their standards next year. “A lot of banks still don’t have that capital in their deposit base, and they are turning down and not participating in what would be good, vibrant loans and projects for the future,” Atherton said. “I see a little bit of a liquidity issue for the banks. That has been slowing down a lot of individual deals.” The difficulty securing financing has caused some deals to fall apart, he said. Despite the challenges, Atherton said Connecticut’s market still holds “incredible opportunity,” especially if the state strengthens technical education pipelines.

Developers active but on guard

Randy Salvatore, founder and CEO of Stamford-based real estate development firm RMS Cos., said he plans to continue investing heavily in multifamily and hotel development in 2026 while closely monitoring economic conditions. Geopolitical tension and tariffs could have “a significant impact,” he said. Slowing employment growth and AI-driven structural changes could weigh on the hospitality sector, Salvatore said, though RMS’s five boutique hotels have been performing well. He said 2025 proved to be as profitable for the company’s hotels as record-setting 2024, and he expects similar results in 2026. Lower and more predictable interest rates should also benefit the company, which typically holds its properties for the long term. “I feel like we are in a good place with (interest rates) and in a good place with inflation,” Salvatore said. Salvatore also said Connecticut’s proximity to New York City could attract more residents and investment, citing concerns among some New Yorkers about policies under Mayor Mamdani. “I have read reports that 500,000 to 1 million people are thinking about moving out of New York because of the policies of the new mayor,” Salvatore said. “If even a fraction of that happens, Connecticut is one of those destinations where people might come.” RMS is developing major apartment projects in Hartford, New Haven, Norwalk and other communities. While absorption has slowed in New Haven amid a wave of new supply, Salvatore said he expects the market to eventually absorb the new inventory. “All of the other markets are really strong,” Salvatore said.