Market Matters

October 2025  

QUICK BITES  

• The broad-based recovery in CRE capital markets continued in 25Q3 with quarterly U.S. sales up more than $18 billion or 17% compared to 24Q3, according to MSCI/Real Capital Analytics. All the major property types recorded double-digit percentage gains, apart from industrial sales which rose 7.5%. Notably, the largest gains in dollar volume of transactions occurred for the office sector, in which sales rose more than $5.3 billion or 38% compared to 24Q3 even while distressed office sales declined modestly. 
  
  
• The results of the latest Institutional Real Estate Allocations Monitor, published this month by Hodes Weill & Associates and Cornell University, signal a positive outlook for institutional capital flows into CRE. Public pension funds recorded the sharpest increase in conviction towards investment opportunities in real estate in at least nine years. The broader sample of institutional investors also reported that the gap between their actual and target allocations to real estate has widened to 90 basis points, which likely raises the need to ramp up CRE purchases in months ahead. For the first time in three years, the survey showed institutional investors expect target allocations to real estate will increase in the year ahead. 
  
  
• Job growth is at a standstill, with unemployment stable. Amid the federal shutdown, ADP data provides the most up-to-date view on U.S. job growth. The payroll processing solutions provider shows monthly private sector employment growth averaged only 22,500 over the past six months and dipped slightly negative in August and September. At the same time, aggregations of state level unemployment claims did not show any significant uptick in continuing claims during that period, or during the first two weeks of October. 
  
  
• Inflation remains near 3%, slightly above the Federal Reserve’s target. With the upcoming social security cost-of-living adjustment forcing the BLS to publish September’s CPI report despite the shutdown, all eyes were on last Friday’s inflation print. But the report showed little departure for the recent trend. Despite employment and real retail sales moving sideways, inflation continues to hold one percentage point above the Federal Reserve’s 2% target as tariffs and immigration crackdowns exert new, upward pressure on goods and services prices. 
  
  
• Bond investors continue to price more rate cuts ahead than the Fed signaled in its last Summary of Economic Projections. Futures prices currently imply just over a 50% probability of at least five additional Federal Funds rate cuts through the end of 2026, whereas the median projections of FOMC members published in September signaled only three cuts over the same period.

KEY THEMES

• SOFR looks set to decline further as the Fed proceeds with the additional rate cuts it has signaled for late 2025 and 2026. The shutdown’s minor drag on economic activity, coupled with the recent slowdown in headline employment growth gives the Fed cover to proceed with the cuts to the overnight deposit rate it signaled at its September meeting. These will provide near immediate benefit to borrowers with floating rate debt. 
  
  
• Still, risks remain that long-term interest rates won’t respond in kind. The most recent census data shows growth in the population of working-age, U.S. born residents averaged only 5,000 per month from 2022-2024. That figure has likely slowed further since then due to aging demographics. With immigration slowing dramatically and deportations averaging more than 15,000 per month recently, wage growth, and the unemployment rate can remain steady even with no net hiring; this tightening labor market supply implies that wage growth has the potential to hold steady regardless of demand-side softening, thereby pressuring inflation and the longer-end of the yield curve. Meanwhile, federal government deficits are set to ramp up from 5% of GDP in 2025 to 7% in 2026 according to the Congressional Budget Office, as additional tax cuts included in the One Big Beautiful Bill Act will provide a cash injection to consumers when rebate checks go out this Spring. It’s far from a given that inflation prospects will significantly abate over the next several months. 
  
  
• Fortunately, leading indicators signaling an uptick in institutional capital flows into CRE continue to accumulate. On balance, the results of the latest Institutional Real Estate Allocations Monitor suggest that recent strong stock market performance has left many institutions needing to play catch-up with real estate acquisitions to balance their portfolios. MSCI/Real Capital Analytics’ latest 25Q3 data shows net acquisitions for both institutional buyers and REITs holding positive for the first time in two years. This momentum looks poised to continue with Preqin data showing the year-to-date total for private real estate fund closings now tracking 20% above the total for all of 2024. REIT bond issuance has also been picking up steam since late Spring. 

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DIVING DEEPER

The Quiet, but Mighty Resurgence in Retail Refinancing Activity

Over the past two years, the recovery in CRE debt liquidity has led and exceeded momentum in CRE property sales, propelling refinancing deals to comprise a record high share of new loan originations in 2025.

The retail sector is no exception. Competition between lenders chasing opportunities to refinance retail properties with limited perceived occupancy risk has heated up dramatically over the past 12 months.

As of September 2025, trailing 12-month refinancing loan originations tied to U.S. retail properties totaled $45.7 billion. The only other year on record when refinancings surpassed this figure was 2019, when volumes totaled $47.2 billion. That means, with interest rates moving lower heading into the typical fourth quarter spike in transaction activity, retail refinancing volume stands a real chance of reaching an all-time high in 2025.

Source: Green Street, MSCI/Real Capital Analytics, Cushman & Wakefield Research

A similar wave of momentum is panning out in the securitized market, where issuance and deal pipelines have surged. Last May, trailing 12-month CMBS loan issuance tied to retail properties reached the highest level recorded in 10 years and volume has held close to that level since. This momentum has mostly been driven by single borrower refinancing deals surpassing $100 million tied to some of the world’s best performing super regional malls. Many of these properties secured two-year floating rate loans with three one-year extension options when CRE capital markets were booming in 2021 and 2022. Today, these loans are nearing maturity and able to refinance once again, but with markedly lower spreads.

A prime example is one of this year’s largest retail refinancing deals, a $2.4 billion CMBS loan on the 2.7 million SF Ala Moana Center in Honolulu, which is 93% occupied and ranks among the 10 largest malls in the U.S. The new interest-only loan has a two-year initial term with three one-year extension options, and a 205-basis point spread over one-month SOFR. The property secured a very similar loan in April 2022, but with a wider, 275 basis point spread. In its appraisal for the most recent loan, the property was valued at $4.39 billion, down less than 1% from its $4.42 billion appraisal when it last refinanced in 2022.

Source: MSCI/Real Capital Analytics, Cushman & Wakefield Research

Thanks to this and other refinancings of high performing malls such as the Houston Galleria and Westfield Century City, refinancing volume for U.S. malls over the past 12 months has more than doubled the pre-pandemic three-year average according to Real Capital Analytics. Refinancing volume is also above pre-pandemic levels for more necessity-oriented retail subtypes with less perceived occupancy risk such as grocery-anchored centers and freestanding/single tenant properties. In contrast, refinancings of power centers and urban/storefront properties are still below pre-pandemic norms.

Source: Green Street, Cushman & Wakefield Research

A further signal of investors’ perceptions and appetites can be gleaned from REIT implied cap rates and private market returns. On the former, the spread between mall REITs’ implied cap rates and implied cap rates for the REIT universe overall has returned to the tightest levels recorded since 2019, signaling that investors are increasingly warming back up to retail, at least on a relative basis. This sentiment shift is also grounded in private-market institutional property performance. According to NCREIF, cumulative unleveraged returns over the past four quarters totaled 6.9% for regional and super regional malls, and 7% for community and neighborhood centers - both well surpassing returns in the traditionally favored apartment and industrial sectors which ranged between 4.5-5.5%. Together, these trends signal a recalibration and re-rating of investor sentiment, positioning high quality malls and community/neighborhood retail centers as resilient, income-generating asset classes for the chapter ahead.

September 2025  

QUICK BITES  

• The Fed has taken another (25 bps) step towards a more accommodative stance despite tensions on both sides of its dual mandate. Their latest Summary of Economic Projections points to another 50 bps of cuts anticipated through the end of this year with another 25 bps in cuts expected for 2026, thereby bringing target policy rates to a range of 3.25%-3.5% by the end of 2026. 
  
• Labor market prompts the Fed’s latest move. Prevailing labor market data has clearly caught the attention of Federal Open Market Committee (FOMC) officials. During his press conference, Fed Chair Jerome Powell highlighted a “marked slowing in both the supply and demand for workers”, a dynamic which is occurring despite unemployment rates remaining low. Such slowing on both sides of the labor market equation is a signal that labor market momentum is fading. 
  
• Bullish sentiment throughout the financial markets prevails in the wake of the latest FOMC meeting. Most indicators continue to reflect a sense of relative market exuberance: investment-grade corporate bond spreads (BBB) to the 10-year Treasury have dipped below 80 basis points for the first time since 2021, a level not seen prior to that since 2004. Meanwhile, the National Financial Conditions Index, which aggregates over 100 variables tracked by the Chicago Fed, shows the loosest financial conditions since the rate hike cycle began. While this optimism is encouraging given all that the economy continues to weather, it’s not without risk. Elevated sentiment leaves markets vulnerable to sharper corrections if economic data takes a downturn. 
  
• A word for the wise as it relates to financial markets and rate cut expectations: Market-implied probabilities are front-running Fed guidance, pricing in a 73% likelihood  that target policy rates track at least 25 bps below the Fed’s outlined path over the course of 2026. The disconnect between Fed guidance and market-implied rate cut expectations leaves room for volatility and downside risk should such rate cuts not manifest as much or as quickly as markets are pricing-in/hope.  
  
• The next cycle of capital commitment and deployment is upon us: our latest “Tide is Turning” edition covers how fundraising for CRE investment is re-accelerating. Private equity real estate fundraising is on pace to end the year up over 30% y/y.

KEY THEMES

• Rate Cut Implications for CRE Cap Rates: Lower costs of capital are setting the stage for a sustained recovery, with the Fed’s recent 25 bps rate cut signaling a more accommodative stance. While it’s early to draw firm conclusions, the 10YT yield has fallen about 25 bps since early August and REIT implied cap rates have largely followed suit. Office and retail sectors saw the largest compression (~50 bps), while apartment and industrial sectors declined more modestly (~20 bps). Additional Fed cuts are likely to drive compression in retail cap rates given wider spreads to corporate bonds and treasuries. Fundamentals continue to hold up and near-zero new supply will cap the downside risk. Tighter spreads in industrial and multifamily may blunt the relative impact of short-end easing, while office is relatively mixed; spreads are wide, but the asset class faces other challenges on the demand side that may limit investor interest. Regardless, a more accommodative Fed is historically supportive of valuations. 
  
• Caveats to these Prevailing Cost of Capital Green Shoots: It’s important to remain grounded as the market shifts. The Fed’s long-run median policy rate remains anchored at 3.0%, suggesting a return to near-zero rates is unlikely absent a severe downturn. Additionally, markets are pricing in deeper cuts than the Fed’s latest SEP, creating upside risk for long-term yields if those expectations aren’t met. Finally, longer-dated yields continue to face upward pressure from persistent fiscal concerns and inflation expectations.
  
• Get Used to Ambiguous Labor Markets: Today’s labor market has turned undeniably stagnant; monthly job growth figures paint this story quite clearly, with trailing three-month job growth averaging just 29,000 new jobs, encompassing net job losses in June.  Paradoxically, the unemployment rate in June went down 10 bps. This points to an uncomfortable labor market dynamic that Powell described as a “curious balance,” wherein both the demand (as evidenced by the weak hiring data) for and supply of labor (in the form of the labor force) have barely budged this year. As a result, the labor market may remain in this “curious balance” for the foreseeable future. Immigration policy is likely to remain restrictive, constricting labor force growth. This implies that the “breakeven” rate of job growth will remain low, requiring fewer job gains to maintain the current unemployment rate.  
  
• Selective Argument for Additional Easing and Lower Neutral Policy Rates:  Newly appointed Fed Governor Stephen Miran laid out a case for not only more aggressive rate cuts but also for a lower neutral rate in a speech to the Economic Club of New York on September 22. Miran’s central argument is that the neutral real interest rate—or r*, i.e. the rate at which monetary policy is neither stimulative nor restrictive—is significantly lower than conventional estimates suggest.  He notes that r* is inherently unobservable and that model-based estimates tend to adjust slowly to structural changes in the economy. His case rests on several forward-looking factors that stand in contrast to the policies over the past several years:
  
  • Slower Population Growth: A sharp decline in net immigration is reducing population growth, which in turn lowers r* by dampening labor force expansion and long-run potential output.
    
  • Demographics: An aging population increases the supply of capital and reduces investment demand, exerting downward pressure on real rates.
    
  • Fiscal and Trade Policy: Miran expects higher national saving (by way of adding additional loanable capital that models haven’t incorporated) due to recent tax legislation and trade agreements. Tariff revenue is expected to top $380 billion per year, and loans and loan guarantees, particularly with East Asian countries, are expected to result in a 7% increase in the credit supply. With an increase in the supply of loanable funds, r* should be further lowered. 
    

Taken together, Miran estimates that r* is roughly 1.0–1.2 percentage points below standard model-based estimates, which peg r* in the mid-3% range. This implies that the current federal funds rate is about 150-200 basis points too restrictive, in his view, suggesting the Fed will need to be more aggressive with rate cuts to get to an appropriate neutral rate of interest. 

Miran’s remarks provide insight into the analytical approach of a newly appointed voting member of the FOMC, while also offering a view into how future Trump appointees could lean. It’s important to note, however, that Governor Miran represents the more extreme end of the labor-market-mandate spectrum within the committee. Several other voting members hold more centrist or inflation-focused views that will likely challenge and counterbalance Miran’s positions.

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DIVING DEEPER

Big-Ticket, Single-Property Sales Are Surging Across Most Asset Types

On the back of the Fed’s rate-cutting cycle, CRE liquidity conditions have turned a corner, with U.S. trailing 12-month property sales rising by double digits through Q2 2025. Still, aggregate sales volume of the four largest property types remains 20% below 2019 levels as certain types of transactions, such as CBD office sales and bulk portfolio deals across property types, have yet to reach escape velocity. That is not the case for single-asset transactions over $100 million in the logistics, retail and multifamily markets, all of which are rising quickly and at the highest levels ever recorded outside of the anomalous mid-pandemic boom.

In the case of logistics and multifamily, higher levels of large-ticket sales partly tie back to one very simple explanation. Following the record development boom that took place in these sectors from 2021-2023, there are far more giant, premium-quality apartment complexes and distribution centers than there used to be. But the surge in new development is only one of many factors driving the recent, sharp uptick in single-asset sales with giant price tags and it doesn’t explain why the retail sector, which has been starved of new construction in recent years, is also participating in the rally. 

Another root cause is that fundraising for CRE investment is back on the rise but extraordinarily concentrated among the largest fund managers. Over 50% of fund closings by dollar volume this year were achieved by the 10 largest funds, signaling an all-time high (by far) for concentration. This has left well-capitalized managers looking to deploy dry powder efficiently via large transactions.

But with economic uncertainty elevated and vacancies under upward pressure across most property types, investors are scrutinizing acquisition targets closely and gravitating towards the highest-quality properties with the lowest occupancy risks even more so than usual. This accentuated risk aversion helps to explain the unusual juxtaposition currently at play in CRE capital markets, where bulk portfolio transactions, while still holding at solid levels, have yet to meaningfully increase in recent quarters even as single-asset sales over $100 million take off.

When space absorption eventually picks up across property types, and investor risk appetite increases, bulk portfolio transactions should rise quickly as the largest fund managers, flush with capital, seek to put large amounts of dry powder to work.

Lastly, it is worth mentioning that, prior to the pandemic, the office sector typically accommodated by far the highest sales volume of single-asset transactions over $100 million of any property type. In 2019, the volume of office sales this size more than doubled that in the multifamily sector. Today, office ranks second behind multifamily and while single-asset office sales over $100 million are rising, they totaled only $14 billion over the past 12 months. It could take several years for them to return to the annual levels of $40-50 billion common before the pandemic. In the short term, this puts high value industrial, multifamily and retail properties even more in focus for well capitalized CRE fund managers looking to efficiently deploy large amounts of dry powder.

August 2025  

QUICK BITES  

• The uncomfortable drift towards stagflation continues, as expected. On the growth side, it’s clear that the economy’s primary engine, the consumer, is pausing further spending increases. Real retail sales excluding gasoline remain anemic, averaging only 0.1% monthly growth through the first half of 2025, less than one-third the pace averaged in 2024. Meanwhile, tariff-induced inflationary pressures are starting to emerge. CPI core goods prices have picked up steam, averaging 0.3% monthly growth so far this year, compared to monthly declines averaged during the three years prior to the pandemic.
• The labor market is providing the Fed with more reasons to lower interest rates. Downward BLS data revisions published on August 1st show the U.S. created an average of just 35,000 net new jobs over the last three months. However, when excluding healthcare sector job gains, payrolls recorded a slight net decline. Meanwhile, the New York Fed’s Survey of Consumer Expectations reported declining one-year household inflation expectations in May and June. With inflation expectations seemingly anchored and job growth cooling, markets are betting that the Fed will view tariff-related impact on prices as transitory and are pricing in 50–75 bps in cuts by year-end.
• Incoming labor market data has done little to rattle financial markets. Five days out from the release of the BLS’ downward revisions, shorter-dated treasury yields have fallen by about 20 basis points, while longer-dated yields have fallen by 10-15 basis points. Investment grade corporate bond markets reacted similarly, while high-yield bond rates were down 5-10 basis points, keeping risk spreads contained in the immediate aftermath of the BLS release.
• Bond markets signal confidence in (perhaps even exuberance for) rate cuts over recession risks. If the reaction in the bond markets feels counterintuitive to what you might have expected, you are not alone. Regardless, the modest declines in yields of higher risk corporate bonds suggest investors are pricing in a higher probability of near-term rate cuts, but minimal risk of recession. With macro and labor data continuing to soften, this remains a favorable window for locking in debt.

KEY THEMES

• Relatively calm financial markets provide a supportive backdrop for CRE lending. In mid-July, the trailing 90-day standard deviation of 10-year treasury yields fell to the lowest levels recorded since just before the Fed began raising interest rates in early 2022. As the policy roadmap of the second Trump administration becomes clearer, interest rate volatility is subsiding. Meanwhile, corporate bond and CRE mortgage rate spreads have fully recovered from the spike that occurred leading up to April 2 reciprocal tariff announcements.
• Momentum in the CRE debt markets is paving the way for the broader capital markets recovery. Origination volume rose 26% year-over-year in 1H 2025, more than twice the growth rate of property sales. The difference was largely driven by outsized growth in refinancings, which at 72% of new originations year-to-date, comprise a record high share of new CRE lending.
• The CRE capital markets recovery is holding up against tariff-related uncertainties and slowing near-term growth. A range of indicators have been improving throughout the Office sector since the middle of ‘24, and investor attitudes towards the sector are gradually reforming. We've reflected on these trends in our latest Tide is Turning article.
• Looking ahead, investors will navigate volatility amid competing market forces: Risks of turbulence remain for the second half of this year as investors weigh the optimism of rate cuts against the reality of slowing growth and sticky inflation. While CRE capital markets have proven resilient, near-term caution may temper the momentum seen in 1H.
• Conviction points for entry are still present. Despite near-term choppiness, the outlook for CRE capital markets recovery remains durable. Our latest “Tide is Turning” edition takes a closer look at both pricing and supply-side dynamics, which now collectively provide investors with cause for conviction to selectively and creatively deploy capital in 2025 despite the uncertain macro environment. Looking ahead to 2026, anticipated rate cuts and improved growth prospects support a gradual recovery in capital markets over the medium term.

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DIVING DEEPER

Apartment and Retail Sectors Leading in CRE Bank Lending Recovery

After declining for a 24-month stretch, U.S. CRE mortgage loan originations by commercial banks have been back on the rise since late 2024. The resumption in bank deposits growth, the gradual cooling of inflation, and the corresponding 75 basis points of interest rate cuts by the Federal Reserve last year have all contributed to the rebound.

Banks’ efforts to cleanse their balance sheets of troubled loans, often by selling them to private debt funds with higher risk tolerances and fewer regulatory requirements, have also been key to freeing up banks’ capacity to resume lending. The purging of risky loans helps to explain why the overall volume of CRE loans held by U.S. banks rose less than 1% y/y as of June 2025, according to the Federal Reserve, even while data from MSCI Real Capital Analytics shows banks’ new CRE loan originations were up 48% in Q2 2025 compared to Q2 2024.

With more than $3 trillion in CRE loans on their balance sheets, banks remain by far the largest holders of CRE mortgage debt outstanding. And despite the recent reacceleration, at $194 billion, banks’ trailing 12-month U.S. CRE loan origination volume is still 45% below their average annual origination during the five years prior to the pandemic when adjusted for inflation. 

Any further movement back towards historically normal levels of bank lending will likely have a massive impact on CRE debt liquidity. As a result, it is worth examining which types of deals banks have targeted first as they ramp up new originations. 

Ten years ago, refinance loans represented about 36% of banks’ CRE loan originations but that share has gradually risen over the long term and hit an all-time high of 69% in the first half of 2025. Conversely, at 11%, the share of originations going towards construction loans is near the lowest levels recorded since 2014.
Given today’s challenging economics for development across property types, and the backlog of maturing CRE debt built up by the 2022-23 interest rate hiking cycle, it’s likely that refinance deals will continue to comprise the majority of bank originations in the year ahead. 

By dollar volume, multifamily properties have garnered the largest increase in bank loan originations over the past four quarters. Bank originations for the sector are rising on a year-over-year basis across all loan sizes except for those over $100 million. As they increase their exposure to the multifamily sector, banks appear to be favoring markets where development has been more restrained in recent years. California, Colorado, Illinois, and New Jersey ranked as the top states for increases in multifamily originations over the last four quarters, while Florida recorded the nation’s largest decline.

The retail sector ranks as the runner up for increase in bank lending over the past four quarters.  However, in many ways the sector has displayed stronger momentum than multifamily. With bank lending on retail properties rising 35% over the past four quarters compared to the four quarters prior, the sector recorded by far the largest increase on a percentage basis. 

Retail loans larger than $100 million recorded the largest absolute and percentage increase, driven in part by refinancing deals for several large suburban malls such as PREIT’s Springfield Town Center in Northern Virginia. In June the property secured a $150 million, five-year loan from Barclays and Goldman Sachs, with a fixed 7.1% interest rate.  

Retail is also the only property type in which bank loan originations increased across all loan sizes over the past 12 months. This is a sign that the sector’s near record low vacancies and lack of supply risk have encouraged banks to target a broad range of retail subtypes for new originations.

Bank loan originations tied to industrial properties rose by $3.9 billion or 13% over the past four quarters. However, this momentum was entirely driven by sub $25 million loans; industrial originations declined for all loan sizes larger than $25 million. This mirrors diverging fundamentals for small-bay vs bulk distribution properties. The recent distribution center building boom has pushed the national vacancy rate for the latter subtype into double digits and to the highest level recorded since 2011. Meanwhile the small-bay sector maintains a sub 4% vacancy rate nationwide. 

Office bank lending has been growing at the slowest pace of the four major property types, with originations growing by 8% over the last four quarters. However, loans larger than $100 million fueled nearly all of the recent pickup, rising by 29% amid a wave of refinancing deals for trophy office and life science properties heavily concentrated in a limited number of markets; namely New York City, Boston, Los Angeles, and Washington D.C. Office fundamentals have been stabilizing in recent quarters and if this trend continues, it will likely set the stage for banks to broaden the pickup in refinancing volume beyond the largest coastal markets and to smaller properties in the year ahead.

June 2025  

QUICK BITES  

• The macroeconomic landscape remains highly uncertain with fluid economic policy developments shaping a range of potential outcomes.
• Our revised baseline forecast anticipates short-term stagflation throughout 2025 driven by abrupt policy shifts and higher tariffs, leading to slower growth and higher inflation.
• Amid slowing growth, the labor market is in transition. May's BLS payroll report slightly beat consensus expectations, lifting equities. However, underlying trends suggest growing softness. Monthly job growth has steadily declined in 2025, averaging 124k/month versus 168k in 2024. Job gains are also increasingly concentrated in fewer industries. In May, the education and healthcare sector alone added 87k jobs, far eclipsing the only 52k jobs added in all other BLS employment sectors combined.
• Bracing for potential renewed pickup in inflation. Both headline and core measures of inflation are still trending in the right direction, with the former nudging further towards target and the latter holding relatively stable near 2.8% y/y in May. However, tariff policies risk exerting upward pressure on inflation in the second half of 2025 as stockpiles of goods imported prior to April run low.
• As stagflation complicates the Fed’s job, they will assess which macro signal blinks first—and brightest—relative to their goals. When faced with a scenario in which their dual goals are in tension, Powell indicated that they would “consider how far the economy is from each goal” and the expected timelines for each of those distances closing. The key is whether tariff-driven inflation is viewed as a short-term impulse or a more lasting force—we expect the former. If longer-term inflation expectations become ungrounded, the Fed is more likely to adopt a more hawkish stance.
• Markets are pricing-in 50 bps in rate cuts for ‘25, consistent with our forecast. For now, the Fed is likely to choose to manage for growth; softening labor markets should prompt the Fed to cut rates in Q4 ‘25, before a more consistent cutting cycle unfolds in ’26 as tariff policies de-escalate and initial tariff-cost and price-pressures ease for businesses and consumers. From there, policy rates are expected to return to a neutral range of 2.75%-3% by early ‘27.

KEY THEMES

• Credit Markets Regaining Their Footing: Credit spreads for both Investment Grade corporate bonds and CRE debt, as proxied by CMBS credit spreads, have reverted to pre-Liberation Day levels. CMBS issuance has also regained traction, with nearly $50 billion in YTD non-agency issuance recorded, which is upwards of 31% higher than where we were through May last year.
• Renewed Liquidity Throughout the CRE Debt Markets to Pave the Way for Gradual CRE Capital Markets Recovery: While downside risks remain and bond market volatility will not dissipate entirely, financial markets are stabilizing following a period of acute volatility. Lenders are displaying a growing appetite to deploy debt capital, offering borrowers improved terms and better optionality. CRE fixed debt costs are still around 70 basis points tighter than they were at the peak of the 2023 rate-hiking cycle.
• The Tide Is Turning in the Office Sector: A range of indicators have been improving throughout the Office sector since the middle of ‘24, and investor attitudes towards the sector are gradually reforming. We've reflected on these trends in our latest Tide is Turning article.
• Our Economic Landscape Presents a Mix of Challenges and Cautious Optimism: While some sectors are facing headwinds, others are beginning to show signs of stabilization. Our Midpoint 2025 report delivers an outlook with comprehensive analysis of each property sector, including the shifting dynamics in industrial and multifamily sectors, along with the evolving trends in retail and office spaces.

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DIVING DEEPER

Renewed Focus on U.S. Fiscal Policy Reinforces Higher-For-Longer Interest Rate Outlook

The second quarter of 2025 was chock-full of public-debt related headlines, including both Moody’s U.S. government credit downgrade and the passage of the U.S. House of Representatives budget proposal, both of which are prompting investors to question the implications for benchmark borrowing costs.

While the House budget bill still needs approval by the U.S. Senate and President, its passage in the House coincided with news of weakening demand at 20-year treasury bond auctions. Investors were quite possibly grappling with the fact that the budget proposal is heavy on tax cuts with a provision to raise the federal debt limit by $4 trillion, or roughly 11%.

Further analysis of interest rate movements by term illustrates the degrees to which policy developments are shifting investor preferences and risk premia. On the short and medium end of the spectrum, three- and five-year treasury bonds have experienced relatively contained volatility; each are up less than 4 basis points since the beginning of April and are at least 100 basis points below their peak levels recorded in the past five years.

• Short-End Investor Perceptions: This minor increase in short-term rates indicates that investors perceive little change to the near-term outlook from the budget plans now making their way through Congress.
• CRE Implication: Originations for shorter, three- and five-year term loans should continue at a healthy pace; borrowers continue to favor these shorter-term loans as an avenue to hedge interest rate risk.

On the other end of the term spectrum, rates for longer-dated U.S. treasury bonds have risen disproportionately. Rates on 10-, 20-, and 30-year treasuries are all up 15-35 basis points since the beginning of April lows and only 25-60 basis points below the highest levels they have hit in the past five years.

• Long-End Investor Sentiment Shifts: This more pronounced divergence at the long end of the yield curve signals investors’ increased anxiety over holding Treasury bonds with lengthy terms, given uncertainty around the path for both deficits, debt, inflation and monetary policy looking ahead into the 2030s.
• CRE Implication: Longer-term yields around the mid-to-low 4%’s are consistent with equilibrium (i.e. real GDP growth of around 2% and an inflation target of around 2%). However, additional, mounting concerns over longer-term fiscal sustainability and inflation have the potential to keep 10-year Treasury rates in the mid-to-high 4%’s in nearly all economic scenarios apart from recession. Episodes where longer-dated yields dip into the low 4%’s or high 3%’s represent a window of relative opportunity for borrowers seeking to secure longer-term fixed financing.

It is tempting to assume that U.S. economic exceptionalism in all its forms (i.e. an investor- and growth-friendly legal system, energy independence, and a proven track record of innovation to name a few) will counterbalance the effects of rising deficits and at least partially help to keep borrowing costs at bay.

Indeed, the U.S.’s $30 trillion economy has scale and growth prospects working in its favor. Only China’s economy comes even close in size but is still less than two thirds as large. The U.S. also consistently outperforms other developed economies in growth; real U.S. GDP has grown by 12% since the start of the pandemic, more than double the pace of growth in the European Union and triple the pace of growth in the U.K.

However, the U.S. is also exceptional when it comes to public debt and not in a good way. At 122%, the IMF’s latest estimates for the U.S.’ 2025 government debt-to-GDP ratio ranks third highest among the world’s 25 largest economies, behind only Japan and Italy.

Not only are debt levels mounting, so too are the costs to service that debt: the IMF last calculated the ratio of interest paid on public debt to GDP for all major economies in 2023. At 3.9%, the U.S. ranked more than double rates in Australia, Japan, Norway and above every nation in the European Union except Hungary.

Data from the U.S. Office Management and Budget (OMB) shows that since 2023, interest paid on federal debt as a share of GDP has risen further. In January 2025, even before the House of Representatives passed its proposed $4 trillion increase to the debt limit, OMB was projecting federal debt payments as a percentage of GDP to continue setting new records each year until at least 2030.

In recent years, foreign investors have also shown diminishing inclination to finance the U.S.’ growing public debt, instead showing a disproportionate preference for corporate securities, which have surged since the pandemic. In stark contrast, foreign holdings of U.S. federal debt (adjusted for inflation) have grown by less than 2% over the past five years. Similarly, foreign holdings of U.S. currency have risen less than 4%, all as foreign holdings of corporate bonds, municipal bonds, and agency or GSE-backed securities have declined by 10-15%.

Resilient global investor demand for U.S. corporate equities signals that global investors don’t necessarily doubt longer-term growth prospects for the U.S. economy and corporate earnings. Rather, they are increasingly wary of the longer-term implications of deficit-funded growth and reticent to finance mounting public debt.

While we expect U.S. exceptionalism to persist, it is realistic to assume that fiscal sustainability challenges have the potential to chip away at the relative ‘exceptionalism’ lead that the U.S. maintains between its global competitors. These headwinds could put a floor on long-term interest rates, making it difficult for long-dated Treasury rates to decline significantly (absent recessionary, pronounced risk-off conditions) unless U.S. fiscal policymakers plot a different course for deficits.

• CRE Implication: We continue to advise our clients to maintain measured expectations for the direction of the longer-end of the yield curve. The more quickly consensus is formed around higher-for-longer prospects across both the debt and capital markets, the more fluid liquidity conditions can become.

May 2025  

QUICK BITES  

Adjust Scenario Probabilities on the Daily

• Formulating Strategy: Contextualizing and planning around a set of scenarios or outcomes is key. Our base case remains Stagflation, with an (unofficial) 50%-60% probability ascribed. Under this scenario, the Fed is positioned to cut policy rates slightly by year-end ’25; CRE demand formation slows as business investment pulls back all as the consumer hunkers down. While not an outright recession, Stagflation will feel uncomfortable, precarious, and choppy. Decision-making across both the CRE fundamentals and capital markets environment will slow amid heightened uncertainty. This cyclical downturn period is expected to curb, but not entirely derail the momentum for CRE capital markets that was forming in Q1 ’25.
• Tariff Trends: Under the post-Geneva tariff policy landscape, the effective tariff rate is going to trend lower than previously expected (i.e. not in the low 20%’s), but still higher than it was pre-Trump 2.0 (i.e. not 2%-3%); prevailing estimates hover around an effective tariff rate in the low teens (around 13%).
• Recession Outlook: Against this new tariff policy backdrop, the probability of a recession is somewhat mitigated, thereby increasing the base case probability for Stagflation. A more positive, upside scenario could emerge if the Trump administration scales back tariffs and de-escalates trade tensions.
• U.S. / China Trade Deal Impact: The U.S. / China trade deal does more towards averting a more negative outcome than it does towards ensuring a truly positive outcome. Had both sides not come to the scale of the agreement they did, the global economy was most certainly headed for recession. Global trade is still stifled, though not entirely embargoed as it was under at 145% China tariff policy.
• Dual Mandate Tensions: The Fed faces conflicting policy pressures. The labor market is easing and inflation is facing mounting pressure from intrinsically inflationary trade policies; neither side of the mandate is flashing alarms just yet, but risks to both bear watching. Powell’s patience, so far, is proving warranted, as the latest U.S./China trade deal loosened financial market conditions, the latter of which feeds directly into broader economic growth and inflation implications. While downside risks and recession risks remain elevated, the Fed has room to cut rates aggressively should growth falter. Powell has emphasized their well-positioned stance, which implies a bias towards patience as they assess incoming data.
• Hard-Data Waiting Game: Much of the economic data released in May (which largely covered the month of April) were recorded too early to capture the impact of tariff policies on the labor markets, the consumer, inflation, and by extension the economy writ-large. However, one of the most real-time indicators of economic sentiment, crude oil prices, have yet to make a meaningful recovery from the 20% decline recorded in the week following April 2nd, reflecting continued caution around global growth prospects.
• Consumers Remain Downbeat on Their Present Circumstances and Outlook, But Their Balance Sheets Tell Another Story. April’s Conference Board’s Consumer Sentiment reading revealed that overall consumer confidence has fallen by 19.3 points over the last three months, just shy of the historically recognized 20-point threshold that predicts a recession. Consumer Expectations for the future are also very weak, though measures of Current Conditions are a bit better, a dynamic which helps to explain why real retail spending is still holding up so far. Household debt obligations remain low relative to prior cycles (trending at around 11% as a percent of disposable income), bolstered by real wage gains registered during the post-pandemic years. Equity market and home equity gains have also generated more resilient household balance sheets.

KEY THEMES

• Credit Market Stabilization: Investment grade (“IG”) corporate bonds jumped 30-40 bps in the weeks following the April 2nd reciprocal tariff announcements; some of this was driven by rising risk premia as concerns over economic growth mounted, while a portion was also driven by a bit of contagion as longer-dated Treasury markets spiked causing liquidity concerns and confusion among bond market participants. Yet, in the weeks following the April 9th reciprocal tariff pause announcement, and particularly following the U.S./China trade deal, investment grade corporate bond markets have settled down, stabilizing by between 20-40 bps, for both Baa and BBB bonds. Even at the peak, the risk spread expansion was relatively tame (and orderly), and IG credit spreads remain below historic averages.
• Re-engagement throughout CRE Debt Markets: It’s natural to see the pause that we saw in the CRE debt markets following Liberation Day; spreads widened by anywhere between 20-50 bps, all as conviction and decisiveness prompted many to halt as the market digested the whipsaw occurring in the equity markets, financial markets and political policy landscape more broadly. Yet, this was clearly temporary – debt spreads have settled back down. While spreads widened temporarily, it’s also important to appreciate where they moved from; AAA spreads over swaps were trending at 94 bps in March ’25, compared to 95 bps in March ’22, well below the cyclical highs of 110s in July ’24. They peaked mid-April around 109 bps, but have since settled back in to the high 90’s/low 100’s. Because spreads are moving off a low base, these episodic shifts will feel dramatic, but the imbalance of significant debt capital to deploy relative to the shortage of deals on the market today continues to drive more competitive and compelling terms from lenders.

• Traction in CRE Debt Markets Leading CRE Equity Markets: Despite being subject to base rate volatility and risk spread expansion (post April 2nd), CRE debt costs are still trending 35-50 bps lower than the October 2023 peak, and debt availability has grown as the lending landscape has diversified across lender types. Financing is available, especially for high quality assets with durable income streams.
• Foundations for CRE Equity Market Recovery: CRE investors are no longer waiting for benchmark interest rates (on both the short- and long-end of the yield curve) to drop in the near term like they were back in the second half of last year. This fundamental change in expectations allows traction to form as investors refocus on the basics of deal and financing structure and on longer-term investment strategy rather than on hyper-focusing on the movements within the short end of the yield curve. We covered our views on the U.S. 10Y Treasury and the long end of the yield curve extensively in last month’s Market Matters.
• Generation Reset: NCREIF NPI cumulative appreciation returns are down a cumulative 18% from their peak, with a positive quarterly return for NCREIF’s All Property NPI registered for the first time in 2.5 years. Returns are stabilizing near trough, so if you’re really set on timing the bottom, institutional valuation benchmarks are signaling impending inflection.
• Contrarian Views on “Why Now”: For now, the investment landscape from a buyer type perspective is still relatively thin. Institutional buyers are showing an early indication of re-entering (their volumes increased by 70% y/y in 2024), but Private buyers are still comprising 56% of the market. Looking at the breadth of the buyer pool last year also suggests that this is a time to lean in as a contrarian; last year, there were roughly 8,200 unique buyers, a figure which was in line with levels we saw in 2016-2017; this measure is down 35% from the peak and about 10% below 2019 levels as well. The pace of y/y growth has inflected, with buyer pools up 1% from a year ago, which typically occurs as capital markets begin to recover. In 2002, for example, a similarly marginal improvement occurred (with a y/y increase of around 10%), meanwhile, the inflection in the unique buyer pool expanded by roughly 30% y/y in 2020 (though it was off more than 55% from peak at the time). 

External Link

DIVING DEEPER

Shift to Safer Havens

In January’s Market Matters edition, we noted the surge in fundraising for closed-end, core and core-plus strategies,  underway as investors gravitated more towards lower-risk/return opportunities.

This type of shift is cyclically common coming out of periods of economic disruption or liquidity crunches as diversified investors begin to reaccelerate CRE purchases at scale. The same pattern emerged in 2010 coming out of the Great Financial Crisis. A similar trend is now underway that began to take shape in 2024 as the Federal Reserve reached the end of its interest rate hiking cycle, clearing the way for investment to re-accelerate into more debt-heavy asset classes including CRE.

Since January, another sign has emerged that confirms rising interest in more conservative CRE investment strategies: investors are gravitating towards safe-haven property types with less cyclical, necessity-oriented demand drivers.

This trend is most visible in the year-to-date changes of publicly traded REITs’ implied cap rates, which offer the added benefit of updating in real time as stock market investors react to daily economic headlines and earnings reports.

So far in 2025, implied cap rates have compressed for REITs owning predominantly telecommunications towers, health care properties, and single-family rentals. Each of these sectors are known as “niche” property types within the CRE industry due largely to their smaller overall market capitalization.  However, leasing within these niche sectors is also driven by secular trends such as the aging of the U.S. population (in the case of health care) and the shortage of affordable single-family housing (in the case of single-family rental). This makes them less sensitive to business cycle headwinds and increasingly popular among institutional investors seeking to diversify their CRE portfolios.

Among the larger, more traditional CRE property types, implied cap rates of apartment REITs have held up best, rising by only 5 basis points so far in 2025. In contrast, implied cap rates for office and lodging REITs have risen by 24 and 56 basis points, respectively.

The diverging performance between these sectors likely reflects investors’ concerns over risks of a recession or slowing economic growth. On average, Apartment notably outperformed the other major property types during and in the immediate aftermath of the past three pre-pandemic recessions. During the same periods, the Office and Hospitality sectors underperformed.