For CRE, Everything Old Will Be New Again

In my June column, I warned that real estate, as a price taker from fixed income, faced greater inflation risk than almost any other asset class, driven by the Middle East conflict and the Central Bank response that followed. Well, as we come back from summer, it feels as though a dam has broken both in terms of the bond market’s willingness to look through “temporary” energy-push inflation and real estate market participants’ willingness to look through “temporary” increases in the financing rate. Let’s take a look at each one in greater detail.

The combination of a continuously tight labor market, strong tech-driven growth and increased fiscal spending on defense means that the U.S. economy is running hot. As a result, we have seen both fiscal and monetary policymakers try to tamp down that heat. On the fiscal side, Treasury Secretary Steve Bessent, attempted to intervene in the bond market to tamper U.S. Treasury yields. On the monetary policy side, Federal Reserve Chairman Kevin Warsh signaled his desire to get inflation back down to 2 percent in a timely manner, which led to a unanimous vote to raise the policy rate in September and now the market is pricing in a further two rate increases in the next six months.

Neither policy intervention has brought down the long end of the yield curve. Why? Because in a well-functioning economy with a growth rate of ~2.5 percent and an inflation rate of 2.5 percent, the “normal” interest rate should be 5 percent. This is how things worked before quantitative easing, and we’re just moving back to Treasury markets as normal.

So where does that leave us as real estate investors? My suspicion is that there was a large consensus in the capital markets at the start of the year that U.S. treasuries would sit somewhere in the mid-4s. The more bullish may have had them coming back down to 4.

So, as much as U.S. appraisal values were not fully reflecting transaction prices, there was a feeling that parts of the market could ride through the energy-driven price shock and come out of the other side unscathed. What has happened over late summer is a moment where many have realized that this is a new normal, or rather a return to the old normal, not a temporary change.

If the market beta is challenged, we will have to work extra hard to create opportunities that entice capital away from fixed income.

If Treasuries are going to sit at ~5 percent then cap rates will need to reflect the new reality in the benchmark cost of borrowing and the competitive investment set for alternative asset classes. Put simply, core real estate sitting at a 5-cap or offering a return in the sixes is simply not that attractive.

As a result, it’s no surprise that we’re seeing a reassessment of pricing, with increased price-chipping to reflect changes in the swap rate. The new/old rate environment means that, as well as increased pressure on core pricing, we’re going to see a renewed interest in investment strategies that manufacture yield.
If the market beta is challenged, we’ll have to work extra hard to create opportunities that entice capital away from fixed income as higher yielding plays. That could come in the form of higher-yielding triple-net lease investment, or strategies that exploit what is likely to be increased capital market dislocation through investment via secondaries.

To be clear, this isn’t just a U.S. issue, although it feels starker because in this capital market cycle, U.S. core has been slower to reprice than in Europe. We’re seeing bond yields normalize at pace in almost every major investment market we operate in, with the notable exception of China. The combination of decades of fiscal excess, still-tight labor markets and an energy price shock is keeping inflation stubbornly high and forcing central banks to raise policy rates in Japan, Australia and Europe. The result is familiar: Pricing is under pressure and markets are dislocating.

The combination of a continuously tight labor market, strong tech-driven growth and increased fiscal spending on defense means that the U.S. economy is running hot.

What would reverse this recent trend and put us in a more benign macro environment, with lower inflation and interest rates? Certainly, a resolution to the conflict in the Middle East and a resumption of normal shipping through the Strait of Hormuz would help, as would a ceasefire or resolution of the Russia-Ukraine war. That said, we likely would not go back to the situation ex-ante in either case. The insurance premia of shipping would remain elevated, and we know that there has been significant destruction of energy production capacity in the Middle East, especially as it relates to liquefied natural gas–and refining capacity in Russia.

More importantly, bond markets would still be looking for a meaningful willingness from fiscal policymakers to engage with the tough work of bringing budgets back under control and/or boosting economic growth to bring down those elevated public debt to GDP ratios. Until that happens, the market rate of interest will remain at a normalized/higher level.

Sabina Reeves is chief economist & head of insights and intelligence at CBRE Investment Management, associate fellow at the University of Oxford and council member of Marlborough College. Follow Reeves on Threads: @sabinareevesconomist or on Linkedin.

Read the October 2026 issue of CPE.