When I first learned to drive a car, I was completely overwhelmed by all the things to remember – how to make a three-point turn, what I was supposed to do at a yield sign, how to merge onto the highway while simultaneously accelerating and checking all my mirrors – it was a LOT.
I remember sitting in my driver’s ed class taking pages and pages of notes. And then when it came time to climb into the driver’s seat…gulp…I didn’t have any chance to dig through my notes to find the answers.
But as with anything, repetition is key. The more I practiced, the more comfortable I got, and the better I understood the relationships between things on my dashboard and actions I wanted to take.
Similarly, when it comes to investing in real estate, there are a LOT of things to learn when you’re first starting out. It might seem like there are a hundred distinct data points that you need to figure out how to connect in order to make it all make sense.
But over time, as you get more and more familiar with the market, with various terms, and with specific deals, many of these things will become second-nature, just like driving.
With that, let’s dive into one of the most important indicators to understand – interest rates. Let’s talk about why interest rates matter, how they impact real estate investors, the history of interest rates over the past few years, and why now might just be one of the best times to get into real estate.
Why Commercial Real Estate Investors Care About Interest Rates
For commercial real estate (CRE) investors, developers, landlords, and lenders, the Federal Reserve’s target federal funds rate is a lynchpin influencing everything from acquisition cost to cap rate calculations.
Why? Because the increasing or lowering of rates causes far-reaching ripple effects throughout the real estate industry.
When the Fed raises rates, debt tends to become more expensive. This means that, when considering buying a property, buyers will want higher returns (more on this in a bit), and when current borrowers are extending or refinancing their existing loans, they may be facing significantly higher costs.
Conversely, when the Fed cuts rates, borrowing becomes cheaper and capital flows back into CRE. This is because, when it costs less to borrow money, it’s easier to make deals make sense, since there’s more room for greater returns.
This is why, when rates were at historic lows in 2020 and 2021, there was a flood of activity in the real estate market, from residential real estate to commercial real estate.
A Quick History Of Interest Rates (2020–2025)
To see how we got here, let’s trace the Fed’s moves:
2020–mid 2021: Pandemic prompted emergency cuts to 0–0.25%.
Mid‑2021 to late‑2022: Inflation surge triggered aggressive tightening. From March 2022 to December 2022, the Fed raised rates in seven steps—from 0.25% to 4.5% .
2023: Continued hikes peaked at 5.25%–5.50% in July. By September 2024, easing began—shifting to 4.75%–5.00%, then 4.50%–4.75%, and finally 4.25%–4.50% in December.
2025: The Fed has maintained the 4.25%–4.50% range while signaling two rate cuts later in the year.
The Fed’s Latest Move: Holding Rates Steady
On June 18, 2025, the Federal Reserve announced it would maintain its federal funds rate at 4.25%–4.50%, marking the fourth consecutive hold since mid‑December 2024.
Fed Chair Jerome Powell emphasized that while inflation is trending toward the Fed’s 2% goal, remaining economic uncertainties—including inflation from tariffs and geopolitical pressure—justify a cautious stance.
The Fed’s updated summary of economic projections, or “dot plot,” forecasts two rate cuts this year, with modest trimming thereafter.
For the CRE market, this “pause with intention” equates to an extended period of higher-for-longer rates, challenging financing and transaction decisions in the near term.
How Elevated Rates Pinch CRE
Increased interest rates tend to propagate through CRE in several interlinked ways:
#1 – Rising Cap Rates, Lower Asset Prices
CRE purchase prices are often evaluated using the formula:
Cap Rate = Net Operating Income ÷ Asset Price
As financing costs climb, buyers demand higher cap rates to deliver adequate returns.
In other words, because it costs more to get a loan to purchase a property, investors want to make sure that the projected returns will make it worth it to take on the higher risk of more expensive financing.
This in turn leads to lower property valuations. How?
Let’s say we have a property whose NOI (net operating income) is $100k per year.
If you were to buy that property for $2M, that means you’d be buying it at a cap rate of 5% ($100,000 ÷ $2,000,000 = 5%).
If financing costs went up, you might be looking to buy that same property at a 10% cap rate. That would change the price to $1M ($100,000 ÷ $1,000,000 = 10%).
This is why, when financing costs go up, property valuations typically go down.
#2 – Loan Refinancings & Balloon Risks
Many CRE loans mature in 5–10 years. Those originated during low-rate periods (i.e., prior to 2022) are now starting to come due and require refinancing—yet borrowers face far higher costs in today’s higher interest rate environment.
The Fed’s drastic rate hikes starting in 2022, which quickly took us from 0% up to 5% and beyond, sharply increased borrowing expenses, reduced bank appetite for CRE lending, and made refinancing extremely challenging.
Bank data shows CRE loan growth was nearly flat (+0.7%) in January 2025—a sign of continued caution.
#3 – Sector-Specific Stress
Keep in mind, however, that not all property types fare the same. Office spaces are under acute distress due to high vacancy and remote-work shifts.
Retail and industrial fare relatively better, though elevated financing costs still bite.
With multifamily, a glut of new supply in many major markets have led to the need to offer concessions to remain competitive with new apartments (e.g., $500 off your first month on a 12-month lease).
However, we’ve seen stronger absorption rates in recent months and expect absorption to strengthen further in the latter half of this year.
This, combined with the projected lowering of interest rates later this year, should lead to an overall stronger multifamily market ahead.
What This Means For CRE Investors
⚠️ Short-Term Impacts
Refinancing Pressure: CRE borrowers with 2025 expirations must refinance at significantly higher costs.
Muted Transaction Volume: Elevated cap rates depress valuations and dampen deal activity.
Stress For Vulnerable Assets: Office and retail assets with weak tenants face refinancing crunch and possible defaults.
🌱 Signs Of Relief
Shifting Capital Sources: Non-bank lenders, including debt funds, increasingly fill the gap.
First-Rate Cuts Potential: Vice Chair Michelle Bowman signaled openness to a July rate cut, citing inflation nearing 2% and loosening labor market conditions.
Forecast & Projections: What’s Coming?
Fed’s Dot-Plots & Market Expectations
Two Fed Rate Cuts in 2025: The Fed’s dot plot suggests two quarter-point cuts this year, followed by modest easing in 2026 and 2027.
Market Caution: Other sources caution that external inflation risks (tariffs, oil prices) could delay or limit cuts—possibly to just one or none.
Long-Term Bond Yields
CRE is strongly influenced by long-term rates, especially the 10‑year Treasury. Even with Fed cuts, 10‑year yields have remained stubborn. Until these yields trend lower, financing costs stay pressured.
What causes the 10-year treasury rates to shift? When investors expect an economic slowdown or lower inflation, they tend to buy bonds for safety, which pushes bond prices up and yields down.
If inflation or economic growth is expected to accelerate, investors tend to sell bonds, thus lowering prices and raising yields.
- In order for the treasury rates to come down, we need more certainty and the expectation of lower inflation, which would lead more investors to buy bonds.
Sector Outlook
Offices: Long-term recovery looks bleak; some warn that values may not rebound to pre‑pandemic levels until 2040.
Industrial / Multifamily: These remain strong. Both industrial and multifamily could recover in 2025 after some oversupply.
Premium Assets: Agencies like CBRE, Colliers, and JLL anticipate a CRE recovery in 2025 with renewed interest from institutional investors, especially in high-quality assets.
What CRE Investors Need To Know (And Do)
Here’s a playbook for navigating elevated interest rates:
| Strategy | Action Step |
|---|---|
| Refinance Smartly | Start early on loan renewals. Compare bank terms vs. debt funds. Prioritize preserving covenants and cashflows. |
| Embrace Floating-Rate Flexibility | Some CRE loans are floating. Hedge smart or align maturities with forecasted Fed cuts. |
| Focus On Resilient Assets | Target industrial, essential retail, multifamily, and high‑quality core assets with strong income profiles. |
| Negotiate Extensions | Communicate with lenders—ask for forbearance or term extensions if refinancing hurdles are high. |
| Recheck Cap Rate Assumptions | Adjust underwriting to reflect current and projected yields. Be conservative when long-term rates remain elevated. |
| Capitalize On Distress | Stressed assets offer upside—if you have capital and patience, this could be one of the best entry points in many years. |
Final Takeaway: Preparing For The “Higher-For-Longer” Reality
Immediate Reality: CRE operates under pressure now—tight financing, cap‑rate increases, stratified asset risk.
Mid-Term Expectation: Markets anticipate the Fed will start easing in late 2025—but don’t expect fireworks. One or two cuts, with long-term rates remaining steady.
Long-Term Game: Success goes to investors who are flexible, capital-rich, and opportunistic—those who lean into select distressed targets and those with strong balance sheets that can hold through stress.
Conclusion: Turning Challenge Into Opportunity
Elevated interest rates aren’t just an obstacle—they’re a re-pricing event. For CRE, that means resetting valuations, repricing debt, and restructuring capital stacks. But in that reset lies opportunity.
As you look to new opportunities, be selective and dig deep to understand the business plan and backup plans and potential deals. As the real estate market pivots from the intense pressure of these higher interest rates into more stabilization in the coming years, you’ll be glad you took action now.
