Commercial Real Estate Inches Toward Stability as Vacancies Jump 14% and Retail Prices Drop 20%

Commercial real estate is settling into an uneasy equilibrium in 2026, shedding the volatility of the pandemic years but still grappling with sector-specific turbulence and macroeconomic headwinds that could derail the recovery. The picture that emerges from market reports and ground-level data is one of cautious stability—what Matt Mellott, managing principal at Sterling Commercial Real Estate, describes as "steady but cautious"—punctuated by sharp divergences across property types and mounting concerns about financing costs tied to the national debt.

The numbers tell a story of a market finding its footing, but not without casualties. Office spaces have largely held steady, with vacancy rates inching up just slightly to 7.66% by the end of 2025, according to Sterling's Market Watch report presented in Missoula. Rent per square foot climbed nearly 3% to $19.32, and sale prices rose 8% to an average of $233 per square foot. But here's the catch: the average size of office spaces sold plummeted 46% to just 3,800 square feet, suggesting buyers are thinking smaller and more cautiously.

Industrial real estate, by contrast, took a beating. Vacancies jumped 9.33 percentage points to 14.4% as companies like UFP in Milltown and Yellowstone vacated their spaces. The average sale price dropped to $158 per square foot, and the size of spaces sold shrank by 44%. This isn't just a blip—it's a sector under pressure, reflecting broader shifts in manufacturing and logistics that saw Missoula lose jobs in those categories even as healthcare employment grew.

Retail spaces faced their own reckoning. Vacancy rates held relatively steady at 3.87%, but rent cratered by nearly 20% to $19 per square foot, and sale prices fell 17.5% to $295 per square foot. It's a sign that landlords are competing harder for tenants in a market where consumer spending patterns have fundamentally shifted. The era of easy retail rents is over, and property owners are adjusting—painfully.

Multifamily housing, meanwhile, saw rents surge 10.5% to just over $1,530 per month, a reflection of Missoula's ongoing affordability crisis and tight housing supply. Yet sale prices for these properties dropped nearly 20% to $154,700 per unit, a paradox that suggests investors are wary of overpaying in a market where financing costs are climbing and returns are harder to predict.

The real wild card in 2026 is commercial land. Sales exploded 300% in 2025, hitting 16 total transactions, with prices averaging $6.38 per square foot. But the average lot size collapsed by 76% to just 6.8 acres, down from 28.4 acres the year before. Developers are buying smaller parcels, a sign they're proceeding incrementally rather than betting big on large-scale projects. It's a rational response to uncertainty, but it also means the kind of transformative development that reshapes markets is on hold.

Missoula's broader economic context helps explain the caution. As of November 2025, the city's unemployment rate sat at 3.1%, with the average weekly wage at $1,160. Total employment dipped slightly—less than 1%—with losses concentrated in manufacturing, hospitality, and professional services, according to Sterling's report. Healthcare continued to expand, but not enough to offset the drag from other sectors. This isn't a recession, but it's not exactly robust growth either.

The real threat, according to Mellott, isn't local—it's national. Financing costs, which move in tandem with the federal debt, are the "biggest risk to the market's stability right now," he told KPAX News. "When the debt is through the roof, the bottom line is it results in inflation," Mellott said. "It's a main contributor to inflation happening and then inflation is killer. It hurts the personal working class, it's the worst thing you can do. You're basically taxing them through devaluing their money."

He's not wrong. Commercial real estate is uniquely sensitive to interest rate fluctuations because so much of it is financed with debt. When the cost of borrowing rises, property values fall, transactions slow, and development grinds to a halt. The Federal Reserve's rate policy, in turn, is driven by inflation concerns—and inflation is driven in part by government spending and debt issuance. It's a feedback loop that Mellott and other industry insiders are watching nervously.

Compounding the problem are local tax pressures. Mellott noted that recent shifts in property taxes have raised some clients' bills by 50%, a staggering increase that eats into profitability and makes it harder to justify new projects. "What I'm hoping for is that the state takes some initiative and shows some leadership in terms of trying to figure out how to address some of the constraints on our markets to be able to get the affordability piece worked out," he said. He's calling for infrastructure investments—wastewater, roads, water systems—that would ease development bottlenecks and bring costs down.

The broader industry is echoing these themes. Commercial Property Executive's 2026 roundup of essential market reports highlights the tools professionals are using to navigate this environment: CBRE's Lending Momentum Index for capital markets snapshots, Cushman & Wakefield's MarketBeat reports for metro-level data, and the MBA's quarterly originations reports for tracking debt market trends. These aren't just academic exercises—they're survival guides for an industry trying to read the tea leaves in real time.

What's clear is that commercial real estate in 2026 is a market in transition. The pandemic's disruptive effects are fading, but they've been replaced by new challenges: uneven sector performance, rising financing costs, tax pressures, and a national economic backdrop that's anything but certain. Developers are thinking smaller, investors are proceeding cautiously, and landlords are adjusting to a new normal where tenants have more leverage and rents are under pressure.

Mellott's assessment—"steady but cautious"—captures it perfectly. This isn't a boom, and it's not a bust. It's a market finding its equilibrium after years of chaos, but doing so against a backdrop of structural headwinds that could easily tip the balance. The next 12 months will test whether this stability holds or whether the cracks widen into something more serious. For now, commercial real estate is holding its breath.