CRE Investors Stop Counting on Lower Rates to Make Deals Work

Higher Treasury yields are forcing commercial real estate investors to confront a tougher question than when borrowing costs will fall: Which deals work if they don’t? With economists surveyed by The Wall Street Journal expecting elevated rates through the rest of the decade, investors are reducing leverage, pushing for prices that support returns and seeking income growth they can generate themselves.

The financing squeeze is already exposing a gap between buyers’ return targets and sellers’ price expectations. Bo Diamond, co-founder and managing partner of Caisson Capital Partners, says most yield-oriented investors want a 6% to 8% going-in yield. But at today’s debt costs, even a 6% first-year cash-on-cash return is difficult to achieve without lower acquisition prices and most sellers of stabilized properties have not cut prices enough.

Caisson has expected rates to stay higher for longer since the Federal Reserve began raising them in 2022. Still, Diamond tells GlobeSt.com, “the world feels very different with the 10-year around 5.25% instead of closer to 4%.”

Investors Face Longer Wait For Lower Rates

The Journal’s survey of 71 economists suggests that investors counting on substantial rate relief may need to revisit their assumptions.

For commercial real estate, the implications extend beyond the cost of a new loan. Higher yields also affect the prices investors can justify paying.

The 10-year Treasury “is the basis of permanent loan rates and influences cap rates,” says Lynn McKee, a CRE expert and professor at Georgia State University’s Robinson College of Business.

McKee argues that today’s rates represent a return to historical levels rather than an unusual departure. She says the exception was the period of historically low rates between the global financial crisis and COVID.

“These low rates inflated the values of CRE and led to the bubble, which burst in 2022-23 when the Fed increased rates to combat inflation,” she says.

Growth And Inflation Keep Pressure On Yields

Several forces are working against a sustained decline in yields. Economic growth, energy-related inflation pressures tied to the Iran war and concerns about U.S. debt began pushing yields higher at the start of the summer.

Carl Tannenbaum, chief economist at Chicago-based Northern Trust, also pointed to the AI data center build-out as a potential source of stronger growth expectations and greater demand for capital.

“It has been a sea change in the fundamentals underlying the fixed-income market and the economy,” Allen Sinai, president of consulting firm Decision Economics, told the Journal.

“The fundamental sea change for me was the recognition of [the need for short-term interest rate hikes] by the Fed.”

Pimco has raised another risk: The 10-year Treasury yield could reach 6%. Beyond inflation and government debt, investors selling losing bond positions could push yields still higher. That is a potential scenario, not a firm forecast, but it adds to the uncertainty buyers and borrowers face.

Buyers Underwrite Deals Without A Rate Rescue

Rather than wait for borrowing costs to improve, some investors are treating current rates as the baseline for their decisions.

Samuel Strauch, principal at Metrik Holdings, says investors are acting “as if the current rate environment is the permanent one.” He describes the adjustment as arithmetic rather than strategic: use lower loan-to-value ratios and ensure a property can service its debt when the loan is drawn, without relying on a better rate later.

That approach puts more pressure on acquisition pricing. As Diamond’s experience shows, buyers may struggle to meet their return targets when sellers hold to prices that don’t account for today’s financing costs.

Sponsors working with Priority Capital Advisory have also stopped planning on a rate rescue, according to founder and President Zack Streit.

“The good news is that credit markets are open and lenders are competing hard for quality deals today,” Streit tells GlobeSt.com. “But with a large wall of maturities still working through the system, that window won’t stay open forever.”

Income Growth Takes On Greater Importance

With investors no longer assuming cheaper debt will improve a deal’s economics, the ability to increase property income matters more.

Chase Jensen of Stockdale Capital says his firm is focusing on “assets with robust demographic income profiles in high-growth markets where we can apply our operational expertise to drive NOI growth.”

That emphasis puts the investment case on the property and its performance, not on a favorable move in interest rates. For buyers, the challenge is to find a price, debt structure and operating plan that work under current conditions—not just under the conditions they hope will return.