SVN Economic Update: Office Values, Interest Rates, Distressed Properties, & Construction Costs

The commercial real estate market continues to navigate a complicated economic environment as we move toward the final months of 2026. Interest rates, construction costs, consumer sentiment, property values, and loan performance are all moving in different directions, creating both challenges and potential opportunities for commercial property owners and investors.

The latest SVN Research Economic Update provides several important indicators worth watching nationally and many have direct implications for the Durham, Chapel Hill, and greater Triangle commercial real estate market.

For property owners, investors, developers, and businesses considering their next real estate decision, here are some of the most important trends.

Office Property Values Are Showing Signs of Recovery

One of the more encouraging developments is the recent improvement in commercial office property values. According to the MSCI-RCA Commercial Property Price Index cited by SVN Research, overall U.S. commercial real estate prices increased only 0.2% year-over-year in July. Office properties, however, significantly outperformed the broader market. CBD office values increased 9.9% year-over-year, while suburban office values increased 4.0%. This represents a notable reversal after years in which suburban offices generally outperformed central business district properties.

For the Durham-Chapel Hill office market, this is an important trend to watch. The Triangle has a diverse office inventory ranging from downtown Durham and downtown Chapel Hill properties to suburban office environments around South Durham, Research Triangle Park, I-40, NC-54 and US 15-501.

The national data does not necessarily mean every office property is appreciating. Location, tenant quality, lease term, occupancy, building condition and financing remain critical. However, improving office valuations could indicate that investors are becoming more comfortable underwriting office assets after several years of significant uncertainty.

Interest Rates Remain a Major CRE Headwind

Financing remains one of the biggest variables affecting commercial real estate investment and development. Minutes from the Federal Reserve's July meeting showed a more hawkish outlook, with many participants indicating additional tightening could become necessary if inflation fails to decline. At the time of the report, Fed Funds futures had priced in a 25-basis-point increase by September and another increase by the end of the first quarter of 2027.

For commercial real estate, higher borrowing costs can affect virtually every part of a transaction. Investors may require higher yields to justify acquisitions. Owners refinancing existing loans may face substantially different debt-service requirements than when those loans originated. Developers must account for higher construction financing costs, while owner-users evaluating whether to lease or purchase commercial space may find financing terms increasingly important to the decision.

In the Triangle CRE market, strong population growth and long-term economic fundamentals can support demand, but even a strong property must ultimately make financial sense under today's cost of capital.

CRE Distress Is Shifting From Office Toward Multifamily

Another significant change is occurring within distressed commercial real estate debt. Office remains the largest source of CMBS distress at 16.7%, but that figure has declined from 21.2%. Meanwhile, multifamily distress has more than doubled since February, increasing from 6.0% to 13.0%. Industrial continues to significantly outperform other property types, with distress of only 1.0%.

Loan modifications tell a similar story. Between May and July 2026, lenders modified 82 CMBS and CRE CLO loans totaling $2.36 billion, with multifamily accounting for approximately 48.4% of modified balances.

This shift is particularly relevant for the Raleigh-Durham multifamily market, given the amount of apartment development that has occurred throughout the Triangle. The report also specifically identifies Raleigh among major metros where renter cost burdens have increased substantially since 2019, reinforcing the tension between housing costs, new supply and household affordability.

For well-capitalized investors, increased loan modifications and refinancing pressure could eventually create acquisition opportunities as owners and lenders work through properties financed during the lower-rate environment.

Construction Costs Continue to Challenge New Development

Commercial construction remains expensive. Nonresidential input prices were 5.4% higher year-over-year, the largest annual increase since January 2023. SVN Research also notes changes to steel and aluminum tariffs that have increased import costs for several construction components. National construction costs are projected to increase another 4% to 6% through the remainder of 2026.

This has meaningful implications for commercial development in Durham and Chapel Hill. Higher replacement costs can make proposed office, retail, medical, mixed-use and industrial projects more difficult to pencil, particularly when combined with elevated financing costs. Developers may need higher rents, lower land costs, greater density or other economic incentives to achieve acceptable returns.

At the same time, higher construction costs can potentially benefit well-located existing buildings. When the cost of developing a competing property increases substantially, existing commercial properties may become more attractive alternatives for tenants and owner-users.

Consumer Confidence and Retail Real Estate Bear Watching

Consumer confidence declined for the second consecutive month in August, with the Conference Board's Consumer Confidence Index falling to 89.4. More importantly, the decline was concentrated in expectations about the future. The Expectations Index fell to 68.2, reflecting increased concern about future business conditions and the labor market.

For Durham and Chapel Hill retail real estate, consumer sentiment is worth monitoring closely. Retail property performance is ultimately tied to the health of the businesses occupying the space. Restaurants, service businesses and traditional retailers can become more selective about expansion when consumers become cautious.

There is some important context, however. Although July retail and food-service sales declined 0.6% from June, they remained 5.0% higher year-over-year, and the report notes that the monthly decline may have been distorted by the timing of Amazon Prime Day.

Housing Starts Are Slowing, But Developers Are Still Planning

Residential construction provides another window into developer confidence. National housing starts declined 12.4% month-over-month in July and were 13.5% below July 2025 levels. Multifamily starts fell 15.6%, while single-family starts declined 9.9%. The South experienced a 12.6% decline in starts.

Permits, however, moved in the opposite direction. Building permits increased 5.0%, including a 9.4% increase in multifamily permits. As SVN Research points out, the divergence between falling starts and rising permits suggests developers are continuing to plan projects while becoming more cautious about actually breaking ground.

That dynamic is particularly relevant for Durham, Chapel Hill and the Triangle, where residential development can have a direct impact on commercial corridors. New housing creates future demand for restaurants, neighborhood retail, medical services, professional offices and other commercial uses—but projects that remain entitled without moving into construction can delay that demand.

What Does This Mean for Durham-Chapel Hill Commercial Real Estate?

The commercial real estate market continues to send mixed signals. Improving office valuations are encouraging, and industrial continues to demonstrate relative strength. At the same time, higher borrowing costs, elevated construction expenses and more cautious consumers create challenges for leveraged acquisitions and new development.

For the Durham-Chapel Hill commercial real estate market, the takeaway is that property-level fundamentals matter more than broad headlines. A well-located office building with strong occupancy may perform very differently from a dated office property with near-term lease rollover. A neighborhood retail property serving a growing residential area may have a different outlook than discretionary retail dependent on destination traffic. And development land that appeared economically feasible under 2021 construction and financing assumptions may require an entirely different valuation today.

Meanwhile, increasing loan modifications and financial pressure in portions of the multifamily and office markets could create opportunities for well-capitalized commercial real estate investors willing to take a longer-term view.

Looking Ahead in the Triangle CRE Market

The remainder of 2026 will likely be shaped by the interaction between interest rates, financing availability, construction costs, tenant demand and investor confidence. For commercial property owners, this makes understanding the value and competitive position of an individual property increasingly important. For investors, periods of market uncertainty can create opportunities, but careful underwriting and local market knowledge remain essential.

The Triangle's long-term growth story remains an important consideration, but Durham, Chapel Hill and Raleigh are not one uniform commercial real estate market. Performance can vary substantially by submarket, property type, tenant profile and even individual corridor.

If you own commercial property in Durham, Chapel Hill or the greater Triangle and would like to discuss how current market conditions may affect your property's value, leasing strategy, investment plans or potential sale, please feel free to reach out.

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Rob Hunt, SVN | Real Estate Associates

Robert.Hunt@SVN.com

919-699-3210

Source: SVN Research, Economic Update, August 27, 2026. The report incorporates data and analysis from MSCI-RCA, the Federal Reserve, CRED iQ, Cumming Group, Chandan Economics, the U.S. Census Bureau, HUD and The Conference Board.