REITs Rebound 4.7% in October as Office Vacancy and Rents Improve

A rebound in October, with conditions

In October, listed real estate recovered most of what it lost over the summer. The FTSE Nareit All Equity REITs Index returned 4.7% for the month. That reversed part of the August and September losses caused by rising interest rates and left the index up 13% for 2026 so far.11 REITs gained while the S&P 500 fell 0.9% and the Nasdaq Composite dropped 5.4%. Telecom REITs led with an 18.4% gain, lodging REITs returned 14.3%, and nearly every property sector finished positive.11 For the year, lodging and resorts (up 57.3%), specialty REITs (up 33.5%) and data centers (up 32.8%) are the best performers.11

The headline number hides a weaker base. Earlier in October, Bank of America calculated that REITs traded at 82% of forward net asset value, against a long-term average of 97%. The implied cap rate of 6.0% was only 76 basis points above a 5.23% 10-year Treasury yield.12 In other words, investors were still discounting the sector because Treasuries offer competitive income. The industry data released in the last two weeks of October points to the same conclusion. Most property types are improving, but the debt behind them is still under pressure.

Office: the recovery is in prime buildings

Office is the clearest example. CBRE's third-quarter report shows national office vacancy at 18.2%. That is down 10 basis points from the prior quarter, 60 basis points from a year earlier, and the fifth straight quarterly decline.1 Net absorption has been positive for 10 straight quarters, leasing reached 63.8 million square feet, and new construction remains at record lows.1 The improvement is concentrated in the best buildings. Prime vacancy dropped 250 basis points year over year to 11.9%, and prime vacancy in Midtown Manhattan is just 1.9%.1 CBRE expects vacancy to keep falling, to about 14% by the early 2030s, because so little new space is being built.7

Other data shows a weaker national picture. Yardi data published by Hubble puts national vacancy at 17.8%, basically flat from the second quarter after five quarterly declines from a 19.9% peak in early 2025. Asking rents for traditional office space also fell in several markets.3 The two firms measure different things, so the levels aren't directly comparable. The direction still differs: CBRE describes steady improvement, while Yardi shows the recovery pausing.

When the two datasets disagree, local results help decide. New York is tightening clearly, with Manhattan vacancy at 10.2% and Brooklyn at 10.3%. Part of that comes from weak buildings being taken off the market or converted.9 San Francisco is recovering because of AI tenants. Cushman & Wakefield reports vacancy at 29.3%, down 410 basis points in a year, and asking rents rising at the fastest pace since 2020. AI companies account for 29% of active tenant requirements.2 Kidder Mathews uses different methods and reports a lower 26.0%, down from a 32% peak in 2024.8 Elsewhere the picture is weaker. Houston vacancy is flat at 25.6% and higher than a year ago.5 Downtown Seattle is about 35% vacant.10 Washington's metro vacancy is 20.5%, while trophy space there is 10.7% vacant.4

The office market is no longer weakening across the board, but it is splitting in two. Owners of the best buildings in strong markets are raising rents. Older buildings in markets like Seattle and Houston are still seeing their value fall.

The debt problem

Lender data tells a less hopeful story. In the Mortgage Bankers Association's third-quarter survey, 4.97% of commercial mortgage-backed securities (CMBS) balances were 30 or more days delinquent, up from 4.82%. Delinquencies at life insurers rose to 1.33% and at government-sponsored enterprises to 1.16%.21 MBA chief economist Mike Fratantoni attributed the increase to weak fundamentals in multifamily and office and to higher rates. He warned that a large volume of loans coming due during a rate spike will be a headwind.21

CMBS delinquency figures differ widely depending on the tracker. Trepp's rate fell 15 basis points in October to 7.87%. That improvement came mostly from a single $975 million showroom portfolio loan becoming current again. Office delinquency rose to 12.33%, and office loans made up most of the month's new delinquencies.22 KBRA reported a 7.7% delinquency rate in October. Its broader distress measure, which includes current loans in special servicing, rose to 10.3%. Both readings are lower than a year ago.24 Each firm covers a different set of loans, so the numbers measure different things. Still, all three trackers rank office as the weakest sector.212224

The main risk is refinancing. One survey counted $875 billion in commercial and multifamily mortgage balances due in 2026 and another $652 billion in 2027.28 Many loans that are paying on time today were underwritten for a world of roughly 3% rates. Refinancing near 7% may require owners to put in new equity even if the building's income hasn't changed.30 One analysis found that 36% of October's $4.7 billion in CMBS hard maturities had debt yields of 8% or less. That suggests many will struggle to refinance at today's rates.30

Apartments: rents are recovering, loans are not

The apartment data is the most contradictory. Apartment List reported that year-over-year rent growth turned positive in October for the first time since mid-2023, but only barely. The national median of $1,384 is 0.1% above last year, and vacancy is declining but still 7%.41 Apartments.com measured annual growth at 1.6%, up from 1.5% in September, even though monthly rents slipped 0.15%.42 Zumper found one-bedroom rents up 0.5% and two-bedrooms up 0.7% year over year, its strongest annual readings since May 2025.47

The trackers agree that rents are rising again but disagree on how fast. They also agree on where growth is strongest. San Francisco leads. Apartments.com puts its annual rent growth at 12.9%, and Zumper's one-bedroom index shows 26.2%.4247 The AI hiring that is filling Bay Area offices also seems to be raising rents nearby. Demand is supporting the recovery. Apartments.com counted 452,000 units rented in the first nine months of 2026, the third-highest total on record. National occupancy has reached 95.5%, and new construction is falling.49 The gains are not even, though. Concessions rose to 4.2% nationally and exceed 10% in several Florida markets, so renters in oversupplied markets still have bargaining power.50 RealPage data shows Class A rents growing while Class C rents fall.49

Multifamily debt is getting worse despite the rent recovery. Trepp's multifamily CMBS delinquency rate rose to 8.04% in September, up from 6.59% a year earlier. The overall CRE special servicing rate reached its highest level since February 2013.25 One lender told Multifamily Dive that the cap rates assumed when many of these loans were written are now out of reach.25 Rents only slightly above last year can't make up for financing costs that roughly doubled. Rent growth alone won't fix stressed apartment loans.

Data centers attract capital, and face growing risks

Data centers remain the sector where demand is strongest. CBRE data cited in an investor guide puts vacancy in eight primary North American markets at a record-low 1.4% for the first half of 2026. More than 7,400 megawatts were under construction, and 80.4% of that was preleased.34 Digital Realty has 1.4 gigawatts under construction at a total cost of $20 billion, and its development pipeline was 63% preleased in the second quarter.33 Capital is coming from many directions. Blackstone launched a listed data center REIT in May, Brookfield-backed Csquare went public in July, and Realty Income formed a hyperscale joint venture.3134

Analysts are also raising more concerns. Coverage points to project delays, limited power and permits, moratoriums in states including New York and Texas, reliance on a small number of tenants, and refinancing risk.31 The wait for a grid connection can exceed four years.34 Data center REIT shares have stalled since Blackstone's vehicle launched, even though the sector is up for the year.31 The physical shortage is real. Investors who keep paying more for that shortage should keep in mind that power availability, not tenant demand, may be what limits growth.

Outlook

On balance, the data shows improving fundamentals for properties alongside worsening debt for older loans. Prime office, Bay Area apartments and data centers have pricing power. Loans written before 2022 on ordinary office buildings and apartment complexes are where losses are likely to show up next. REIT results depend heavily on the 10-year Treasury yield. Realty Income's roughly 5.4% dividend yield is only about 40 basis points above a 5% Treasury yield.13 If yields stay near 5% through the fourth-quarter maturities, October's rally will look like a pause in the downturn. A sustained drop in yields would make it look like the start of a recovery.