{"id":1004778800,"date":"2025-11-19T11:33:36","date_gmt":"2025-11-19T19:33:36","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004778800"},"modified":"2025-11-19T12:33:55","modified_gmt":"2025-11-19T20:33:55","slug":"balancing-act-031-exchanges-and-interest-rates","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/balancing-act-031-exchanges-and-interest-rates\/","title":{"rendered":"Balancing Act: 1031 Exchanges and Interest Rates"},"content":{"rendered":"
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Julie Baird and Xander Snyder<\/figcaption><\/figure><\/div>\n\n\n

Real estate investors contemplating the sale or purchase of property are likely keeping a close eye on interest rates or, more specifically, mortgage rates. However, a variety of factors are clouding the outlook for rates. With the path of interest rates and mortgage rates uncertain, what does this mean for real estate markets\u2014and more specifically, for investors contemplating a 1031 exchange?<\/p>\n\n\n\n

If you\u2019re unfamiliar with 1031 exchanges, they are a powerful tool that allows real estate investors to defer capital gains taxes on the sale of an investment property by reinvesting the proceeds into a new \u201clike-kind\u201d property of equal or greater value, offering additional flexibility as well as enabling buyers to secure opportunities now and refinance under better conditions later. More broadly, 1031 exchanges can boost economic activity and contribute to federal, state, and local tax revenues by removing friction and supplementing transaction activity.<\/p>\n\n\n\n

Where are interest rates and mortgage rates headed?<\/strong><\/h2>\n\n\n\n

The Federal Reserve has a dual mandate: maximum sustainable employment and stable prices. At the time of this writing, inflation remains above the Fed\u2019s target rate of 2 percent, and many economists have concerns that current U.S. tariff policy could drive inflation higher in the coming months. At the same time, the labor market is softening.<\/p>\n\n\n\n

A slowing job market combined with the risk of re-accelerating inflation means the Fed faces a tough balancing act. To combat inflation, the Fed would normally increase interest rates to increase the cost of borrowing and slow the economy down. But, to boost the job market, the Fed typically cuts interest rates to stimulate growth and encourage hiring. For now, the Fed appears to be prioritizing the employment side of the equation by cutting interest rates.<\/p>\n\n\n\n

Conventional wisdom suggests that when the fed funds rate falls, mortgage rates follow\u2014and while a relationship exists between the two, there are many factors that impact mortgage rates, and they don\u2019t necessarily move in lockstep with federal funds rate cuts. Variable rate loans tend to be tied to the Secured Overnight Financing Rate, which closely tracks the fed funds rate. But, fixed-rate loans are typically benchmarked to the 10-year Treasury, a U.S. government debt security that has a maturity of 10 years, and long-term rates are determined by the market (not directly by the Fed). In fact, if markets anticipate inflation risk, long-term yields can go up, even when the Fed is cutting interest rates, which happened when the Fed began cutting rates in late 2024.<\/p>\n\n\n\n

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Other factors affecting CRE<\/strong><\/h2>\n\n\n\n

Of course, interest rates are not the only factor affecting the commercial real estate market and investors\u2019 ability to buy and sell properties. For example, when the labor market weakens and people are unable to find new jobs as easily, housing market turnover slows down as fewer people relocate to pursue new roles or trade up into new homes after a promotion or taking a new higher paying position. That dynamic can hold back single-family transaction activity and keep both renters and existing homeowners in place longer.<\/p>\n\n\n\n

Market dynamics vary widely across different asset classes. In the second quarter of 2025, the office sector posted year-over-year growth in both central business district offices and suburbs, likely reflecting price adjustments that made select deals more attractive. Even so, transaction volume remains well below pre-pandemic levels, with a bifurcation across quality tiers. For example, class A+ properties are generally outperforming lower-quality assets.<\/p>\n\n\n\n

In retail, risks to consumer spending could have negative implications for the sector overall, but in terms of leasing stability, limited available space helps put a floor under rents. Additionally, retail REITs have recently reported substantial leasing spreads, as underperforming tenants move out and stronger tenants move in.<\/p>\n\n\n\n

Meanwhile, the industrial sector has faced a wave of new supply in recent years, much of it not pre-leased. For spaces that serve consumer-driven businesses, like distribution facilities for e-commerce or brick-and-mortar retailers, a pullback in consumer spending could temper demand for space. The sector is also experiencing a flight to quality, with many industrial tenants consolidating into smaller, higher-end spaces.<\/p>\n\n\n\n

Implications for CRE transactions and 1031 exchanges<\/strong><\/h2>\n\n\n\n

Looking ahead to the next market cycle, it\u2019s important to note that, while prices for commercial properties have generally fallen, lower prices attract capital back to the purchase market. So, while consumers may be tightening their belts and looking to stay put if they already own a home, commercial real estate investors are finding more deals penciling out than several years ago, which is likely to gradually boost transaction volume in the coming quarters. On the leasing side, demand is softening as businesses navigating economic uncertainty may be less inclined to lease office, retail or industrial space.<\/p>\n\n\n\n

1031 exchange volume generally tracks broader real estate activity. When rates decline, activity often picks up as debt becomes more affordable\u2014but outcomes still depend on factors such as asset class, geography and broader market trends and sentiment. For example, the most recent rate cut by the Fed actually led to an increase in mortgage rates. Notably, a Fed rate cut doesn\u2019t guarantee lower mortgage rates. If longer-term Treasury yields rise on shifting inflation or growth expectations, mortgage rates can move higher, even as the federal funds rate falls. In slower markets, reduced transaction activity can also limit the menu of available replacement properties. At the same time, the increased access to capital enabled by a 1031 exchange sometimes places exchanging investors in a stronger position to make strategic investment choices in otherwise challenging markets.<\/p>\n\n\n\n

Given current conditions, investors exploring 1031 exchanges are conducting deeper diligence on potential replacement properties before selling. That front-loaded work can shorten the time between the sale closing and the purchase closing. In addition, more investors are considering reverse exchanges in which the investor acquires the replacement property prior to closing on the property they are selling.<\/p>\n\n\n\n

Regardless of the interest-rate path or deal volume, investors need to engage the right professionals\u2014lawyers, tax advisors, real estate experts, and qualified intermediaries\u2014to help them make informed decisions and maximize the benefits of 1031 exchanges.<\/p>\n\n\n\n

Julie Baird is president for First American Exchange<\/a> and Xander Snyder is senior economist for First American<\/a><\/em>.<\/p>\n\n\n\n

Julie Baird is president for First American Exchange Company LLC. First American Exchange Company, LLC, a Qualified Intermediary, is not a financial or real estate broker, agent or salesperson, and is precluded from giving financial, real estate, tax or legal advice. Consult with your financial, real estate, tax or legal advisor about your specific circumstances.<\/em><\/p>\n\n\n\n

Nothing contained in this article is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This article is intended for educational and informational purposes only.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

What the current environment could mean for your next transaction.<\/p>\n","protected":false},"author":3891,"featured_media":1004778801,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21783,21684],"tags":[52737,52736],"class_list":["post-1004778800","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investment","category-viewpoint","tag-first-american","tag-first-american-exchange"],"acf":[],"yoast_head":"\nBalancing Act: 1031 Exchanges and Interest Rates - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/balancing-act-031-exchanges-and-interest-rates\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Balancing Act: 1031 Exchanges and Interest Rates\" \/>\n<meta property=\"og:description\" content=\"What the current environment could mean for your next transaction.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/balancing-act-031-exchanges-and-interest-rates\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2025-11-19T19:33:36+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-11-19T20:33:55+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2025\/11\/JulieBairdXanderSnyder.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"800\" \/>\n\t<meta property=\"og:image:height\" content=\"620\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Julie Baird and Xander Snyder\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/balancing-act-031-exchanges-and-interest-rates\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/balancing-act-031-exchanges-and-interest-rates\/\",\"name\":\"Balancing Act: 1031 Exchanges and Interest Rates - 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