While commercial real estate investment sales gained significant traction in the first half of the year, slowing job growth, a Fed rate hike, and rising 10-year Treasury yields are complicating transactions and now threaten to derail that momentum.
In September, the Federal Reserve raised the federal funds rate by 25 basis points (0.25 percentage points) to a target range of 3.75%–4%, marking its first rate hike in more than three years. The hike was largely in response to persistent inflation, which rose 3.4% on an annual basis in August 2026, well above the Fed’s 2% target. In announcing the hike, the Fed maintained that economic activity was “expanding at a solid pace” in spite of geopolitical uncertainty, pointing to resilient domestic spending, steady job growth, and robust capital investment.
Then came the September jobs report. The economy added just 29,000 jobs, far below economists’ expectations of around 84,000. The Bureau of Labor Statistics (BLS) also revised the previous two months’ job totals down by a combined 60,000. July was revised down by 31,000 jobs, from a previously reported gain of 21,000 to a loss of 10,000, and August was revised down by 29,000 jobs, from 162,000 to 133,000. Wage growth also slowed to 3%, its lowest annual level since May 2021. The unemployment rate remained virtually unchanged, edging up slightly to 4.2%. And the near-term outlook isn’t any brighter. According to a Reuters report, economists expect high energy prices and supply chain disruptions from the ongoing Iran war to negatively affect the labor market through the end of this year and into 2027.
At the recent Mortgage Bankers Association (MBA) 2026 Annual Convention, MBA Chief Economist Mike Fratantoni predicted two additional 25-basis-point rate hikes, with the first in December and the second in Q1 2027. “Inflation remains well above the Fed’s target, and while the job market is not strong, we expect that the FOMC [Federal Open Market Committee] will continue to focus intently on pushing inflation down to its 2% target,” said Fratantoni.
Higher interest rates and a slowing job market are affecting CRE transactions. Compounding the pressure is the sharp rise in 10-year Treasury yields, which topped 5% in September and reached 5.24% on October 9, up more than 130 basis points since late February. Higher yields are pushing property valuations down. Green Street’s Commercial Property Price Index rose 4.7% over the past 12 months but slipped 0.1% in September.
“If this rise in yields sticks, property prices are likely to go down,” said Peter Rothemund, Co-Head of Strategic Research at Green Street. “I think the question people are asking now is ‘how much.’ That’s hard to say, but pricing for sectors with solid fundamentals is likely to hold up better than pricing in sectors with limited growth.”
During his MBA presentation, Fratantoni added that he expects the 10-year Treasury yield to average 5.1% in Q4 2026 and remain close to 5% through 2027.
What Does This Mean for CRE Investors?
When lenders require a minimum debt service coverage ratio (DSCR), higher interest rates restrict loan sizes. Because a property’s net operating income divided by the required DSCR sets the maximum annual debt payment, rising interest rates increase the servicing cost per dollar borrowed, which reduces how much a buyer can borrow.
With the 10-year Treasury yield above 5%, institutional lender spreads (typically 175–275 basis points) push all-in commercial debt costs into the 7%–8% range. When borrowing rates are in this range, they exceed prevailing property cap rates, typically 5.5%–6.5% across core sectors, creating negative leverage and forcing buyers to seek lower purchase prices. This is precisely what is occurring now.
The Wall Street Journal recently reported that some CRE investors are demanding price reductions or other forms of concessions before finalizing previously negotiated terms because of the rise in financing costs. When buyers initially sign a contract, a 6- to 12-month period typically follows before the deal closes. In a lending environment with rapidly rising rates, deals may no longer pencil. Renegotiating agreed-upon terms or threatening to walk away before closing is known as retrading. The CRE retrading trend began in the summer of 2025 and has gained momentum since the Fed’s September rate hike. “These retrades are an early sign of broader market distress weighing on property values, slowing development and making maturing loans harder to refinance,” the WSJ reported.
Silver Lining for Investors
Of the more than $5 trillion in outstanding commercial mortgages held by lenders and investors, $875 billion is scheduled to mature in 2026, with an additional $652 billion coming due in 2027, according to the MBA. Of the loans maturing in 2026, 30% are backed by hotel/motel properties, 23% by industrial assets, and 17% by office properties. Many of these loans were originally issued when borrowing costs were 3%–4%, but refinancing today will be difficult, especially if Treasury yields stay above 5%, pushing all-in debt costs to 7%–8% for many loans.
As the “extend and pretend” practice (in which lenders postpone recognizing loan losses by extending maturity dates) wanes for most institutional lenders and refinancing amid lower property valuations isn’t an option, many property owners will have no choice but to sell, often at a steep discount.
In a recent interview with GlobeSt.com, Mark Leverette, a partner at tax, accounting, and advisory firm BPM, said, “Many of my clients stand ready to move on opportunities. After months of delaying decisions, the market is approaching an inflection point. With a significant wave of loan maturities ahead, many owners will need to adjust expectations, and lenders could increasingly drive transactions, creating opportunities for well-positioned buyers.”
To learn more about investment opportunities in Southern California, contact one of Voit Real Estate Services’ trusted commercial real estate advisors.