Commercial Real Estate: Risk, Repricing, and Opportunity

Higher Rates, Wider Dispersion, and a More Selective Opportunity Set

The commercial real-estate market entered 2025 under continued pressure from higher interest rates. Transaction volumes remained depressed throughout 2024 and into early 2025, following a sharp decline from 2022 to 2023; activity began to recover modestly over the course of the year, with transaction volume increasing approximately 25% year over year in the third quarter. Despite this improvement, overall activity remains below pre-rate hike levels.

Higher interest rates reshaped returns through two primary channels:

1. Higher borrowing costs directly increasing the cost of debt
2. Higher rates pushing cap rates upward, which, all else being equal, results in lower property valuations

Outcomes have been uneven across sectors. Multifamily faces pressure from negative leverage, industrial is normalizing after a COVID-driven e-commerce boom, retail has bifurcated, office continues to face challenges from work-from-home trends and reduced access to capital markets, hospitality remains stable but subdued, and data centers continue to benefit from structural demand growth driven by AI and cloud computing. Overall, prime, highly occupied, well-located assets remain in demand, while value-add and distressed office assets continue to attract limited buyer interest.

Debt Capital Markets

The Federal Reserve’s aggressive tightening cycle raised the cost of debt, pushing cap rates higher and resulting in lower property valuations (price = net operating income / cap rate). Assets that were largely sought after for yield were affected the most, as their cap rates had previously contracted the furthest. As loans on properties come due, refinancing has become more challenging at higher rates, with lenders frequently requiring paydowns, higher debt service coverage ratios, and lower loan-to-value ratios. While the extent varies by sector, some borrowers may face both higher base interest rates and wider spreads. The office sector, in particular, has limited access to the debt capital markets altogether.

Distressed sales have remained largely subdued, as lenders continue to “pretend and extend” in an effort to avoid losses associated with forced sales. As extensions increasingly require borrower paydowns, investment managers have identified opportunities to provide “rescue capital” in the form of preferred equity or mezzanine debt. Distress also remains concentrated in specific sectors and is being driven by higher interest rates and structural demand shifts, distinguishing it from the post-GFC period, which was primarily driven by systemic banking stress.

Sector Overview

• By and large, the office sector has experienced the most significant change, driven by a structural decline in demand resulting from remote work. This shift has led to higher vacancies and has cascaded into credit stress: office debt has become difficult to access, while office loans have been the single largest contributor to defaults and delinquencies. In some CMBS vintages, office delinquencies exceed peak levels observed during the GFC. The office market is also undergoing a pronounced flight to quality. Prime, amenitized, well-located properties continue to see strong demand, while the weakest assets face fundamental questions about their long-term viability.
  
  
• The multifamily sector attracted a significant influx of yield-seeking capital during the low-interest-rate environment, driving cap rates to historic lows and fueling elevated development activity. The subsequent rise in interest rates has resulted in many properties experiencing negative leverage upon acquisition or refinance, where the cost of debt exceeds the property’s unlevered cash-on-cash yield and cash flow after debt service is negative. At the same time, oversupply from heightened development activity persists in certain markets, placing pressure on rental rates and increasing competition through concessions. Fundamentals continue to vary by property and region, with high barriers to homeownership and demand from Millennials and Gen Z supporting long-term renter demand.
  
  
• The hospitality sector has remained resilient but subdued in 2025, with performance varying meaningfully across segments and markets. The sector weakened over the year, beginning with tariff announcements and exacerbated by a decline in international inbound travel. Upper upscale properties have been less affected, while lower-end segments have felt the greatest impact from softening consumer confidence. Following a slower post-COVID recovery, the upper upscale segment has benefited from the return of corporate and group travel. Resort markets, by contrast, have seen a modest pullback following the post-COVID demand surge.
  
  
• The industrial sector experienced a significant boom during the COVID period due to increased e-commerce activity. Fundamentals normalized in 2024 and 2025 as new supply shifted the supply/demand balance. While overall investor appetite remains healthy, selectivity has become increasingly important, with a sharper focus on asset location.
  
  
• The retail sector has bifurcated between experience-driven and prime urban retail, which continue to exhibit strong fundamentals, and secondary retail malls, which show more mixed performance. Grocery-anchored retail properties have continued to demonstrate resilient fundamentals.
  
  
• Data centers have attracted substantial institutional capital in recent years and represent a distinct property type, as specialized buildouts make many assets mission-critical for tenants. Power availability has emerged as a key constraint; in certain regions, wait times for power can extend multiple years. These power constraints are shaping development decisions, influencing land values, and driving higher lease rates in markets where power is scarce.

Implications for Institutional Investors

Post-COVID commercial real-estate market dynamics continue to unfold gradually, favoring investors who can move deliberately, underwrite complexity, and deploy capital with flexibility. At Crewcial Partners, we view this as a market that rewards patience, selectivity, and the ability to invest across the capital stack. By emphasizing fundamentals and structuring investments to protect the downside, we believe this phase of the cycle offers a compelling opportunity to generate durable, risk-adjusted returns without relying on a rapid rebound in valuations.