What Happened
U.S. treasury markets were exceptionally calm in late 2025 and early 2026, but that tranquility hasn’t lasted through mid-year. Since the U.S. launched Operation Epic Fury in late February, both 5- and 10-Year Treasury yields have been on an uptrend and are currently 55-80 bps above their February troughs.
Concerns over an inflation resurgence are driving rate increases. Retail gasoline prices fell in June when the Memorandum of Understanding (M.O.U.) between the U.S. and Iran was signed, but as of mid-July, they remain 29% above pre-war levels. The most recent reading of the Fed’s preferred inflation gauge, the PCE Price Index, showed inflation up 4.1% year-over-year (YOY) as of May, double the central bank’s 2% target.
While the Fed left rates unchanged at its June FOMC meeting, its Summary of Economic Projections (SEP) showed most committee members expected to raise the Federal Funds rate at least once before the end of 2026. Following this pivot, bond investors are pricing in an even more hawkish outlook than the Fed’s own projections imply. Early this year, markets priced in a near 0% chance of a Fed rate hike in 2026. Those odds have since shifted, with markets now pricing 42% odds of one hike by year-end, a 29% chance of two hikes, and an 8% chance of three. Cumulatively, that’s a 79% likelihood of at least one hike by the end of the year.
CRE Impact
Sudden spikes in treasury rates often cause a temporary pullback in CRE property sales volume, as investors pause to reassess pricing, financing costs, and return expectations. Following the rate volatility that accompanied the Trump administration’s April 2, 2025 announcement of sweeping reciprocal tariffs, property sales volume fell the following May. A similar one-month lag occurred following the February 28, 2026 launch of Operation Epic Fury: U.S. CRE sales volume remained healthy in March, but April volume was down 14% compared to 2025. However, sales rebounded sharply in May, putting combined April-May 2026 volume up between 4%-9% versus the same period in 2025, according to MSCI/Real Capital Analytic and CoStar, with the industrial and retail sectors driving the gains.
So far, there have been very few signs that the uptick in Treasury rates has negatively impacted CRE sales pricing. During the first three months of the war in the Gulf, MSCI/Real Capital Analytics’ Commercial Property Price Index continued to rise for all major property types with the exception of apartment – arguably the most rate-sensitive property type given its current combination of relatively low cap rates and limited NOI growth – where pricing fell 1.1%. Meanwhile, implied cap rates for apartment, office, and mall REITs are all currently below late-February levels, while those of industrial REITs have held steady around 5%.
Much of this resilience in CRE sales volume and pricing ties back to the fact that CRE debt markets have remained highly liquid in recent months – if anything, loan origination activity has sped up. Federal Reserve data shows that from March through June 2026, commercial banks’ total CRE loan portfolio grew by an average of $1.9 billion per week. That is almost double the average weekly growth rate of banks’ CRE loan books during 2025 ($1.1 billion), and it exceeds the weekly pace of bank loan growth during the first two months of this year ($1.7 billion). Following a strong showing in the last three months, global CMBS issuance has also totaled $118 billion so far in 2026, the strongest year-to-date tally through June recorded since 2021.
No Signs of a Pullback in CRE Lending
Bank Lending and CMBS Issuance Both Proceed at a Healthy Pace
Most lenders are looking past near-term geopolitical volatility, seeing the current market as favorable for increasing CRE exposure – the sector has recently emerged from the 2023-2024 pricing correction and is entering a period of limited speculative development, just as NOI growth has begun to accelerate across most property types.
This conviction that downside risks are limited has helped keep lending spreads tight, particularly for lower-risk loans. Following the Trump administration’s announcement of reciprocal tariffs on April 2, 2025, 10-year Treasury yields rose 50 bps in less than two months. During that period, lending spreads for AA-rated CMBS loans rose by another 47 bps, peaking at 198 bps. Following the start of Operation Epic Fury in 2026, the debt market reaction has been more muted: AA-rated CMBS spreads rose only 29 bps, peaking at 151 bps, and have since retraced those gains.
Lending Spreads Remain Borrower Friendly
CMBS Conduit Spreads Over Treasuries for 10-Year Average Life Loans by Credit Rating
While the recent jump in Treasury rates hasn’t derailed CRE lending spreads or origination activity, it has driven a substantial shift among borrowers toward floating-rate debt. This ties back to the fact that the key base rates for fixed-rate CRE loans, 5- and 10-year Treasury yields, have both increased significantly since late February and now stand in the mid-4% range, while SOFR, the base rate for most floating-rate debt, has actually declined slightly since late February and now stands near 3.6%. In fact, at about 75 bps, the current premium 5-Year Treasury rates maintain over SOFR is the widest recorded in four years. Meanwhile, across property types, average lending spreads for 5-year floating-rate mortgages are only about 35 bps higher than those offered for comparable fixed-rate loans. As a result, borrowers are increasingly opting for floating-rate debt to secure lower all-in debt costs on day one of their new loans.
Borrowers Shifting to Floating Rate Debt
Share of Originations Comprised of Floating Rate Loans by Property Type
According to MSCI/Real Capital Analytics, floating-rate deals have comprised the highest share of new U.S. loan originations since 2022 across each of the four major property types. In the retail and industrial sectors, floating-rate loans account for 88% and 64% of year-to-date origination volume, respectively – well above year-to-date shares of 45% in the office market and 31% for apartments. The former two sectors’ ability to accommodate a larger share of new floating-rate debt likely ties back to their more bullish near-term outlooks for NOI growth. Recently released data from NAREIT shows that in Q1 2026, same-store NOI growth among industrial and retail REITs accelerated to 5.6% and 3.8%, respectively – more than triple the reported NOI growth rates among office and apartment REITs.
Conclusion
CRE debt liquidity has proven resilient in recent months, and tight lending spreads are helping limit any significant damage to property volume and pricing from rising Treasury rates. This is particularly true in the industrial and retail sectors, where faster NOI growth is facilitating the shift toward floating-rate debt.
For many CRE owners with immediate debt needs, higher 5- and 10-Year Treasury rates should push borrowing toward floating-rate debt, since interest rates on floating-rate deals are benchmarked to SOFR, which has been anchored near 3.6% recently.
Voting members of the FOMC, who determine the path of SOFR via their control of the Federal Funds rate, understand that rate hikes won’t directly address upward pressure on prices from the current energy supply shock. The Fed’s latest Summary of Economic Projections (SEP) shows only a narrow majority favor any increase to the Fed Funds rate in 2026, and projections for 2027 and 2028 favor a subsequent 25-bps rate cut during each of those years.
Moreover, since the June 12th deadline for Fed officials to submit their economic projections for the latest SEP, crude oil prices have fallen 7%, and the June reading for the consumer price index was released, showing a 0.4% drop in headline inflation last month and no change in core inflation which was up 2.6% YOY. This all increases the likelihood that policymakers could adopt a somewhat less hawkish tone at future meetings, particularly if energy-related inflation eases further.
The key variable to watch, however, is longer-term inflation expectations. The 5-year, 5-year forward breakeven inflation rate is currently around 2.2%, suggesting investors still expect inflation to return to levels broadly consistent with the Fed's target over time. As long as those expectations remain well anchored, upward pressure on long-term Treasury yields should remain manageable. However, if investors begin to believe inflation is becoming more entrenched, inflation expectations could drift higher, pushing Treasury yields higher and creating a more challenging financing environment for CRE.
Even in the unlikely event that multiple rate hikes do occur over the next several months, those increases come with the risk that the Fed ultimately overshoots and is forced to reverse course shortly thereafter. Floating-rate borrowers would be well positioned to benefit from any such policy reversal.
