The Federal Reserve’s September 2025 rate decision marked the first meaningful turn in monetary policy since the tightening cycle began in 2022. By cutting the federal funds target range by 25 basis points to 4.00–4.25 percent, policymakers signaled that interest rates have peaked and that measured easing will continue through year-end. For commercial real estate, where capital costs have defined the market narrative for three years, this move represents a turning point: financing math is shifting, sentiment is improving, and the path to recovery is beginning to form. Yet this reset will play out unevenly across property sectors, with some markets positioned for immediate benefit and others still weighed down by structural headwinds.

Through 2024 and much of 2025, U.S. commercial real estate endured a standoff between buyers and sellers. Values had fallen roughly 18 percent below their 2022 peak, according to Green Street, but liquidity was scarce. Owners resisted selling at discounts, while buyers refused to transact at financing costs that often made deals uneconomic. The result was a “shadow freeze” in the market, with transaction volumes at decade lows. The Fed’s September pivot signals the beginning of a capital cost reset. It offers a credible ceiling on interest rates and a floor on valuations, allowing investors to model forward cap rates with greater confidence.

Cap rates, which expanded steadily through 2022 and 2023, are now flattening and beginning to compress in select sectors. Debt spreads remain wider than before the tightening cycle, but the base rate relief lowers borrowing costs across the board. This shift does not guarantee a return to the 2021 environment of ultra-cheap capital, but it does unlock the possibility of renewed deal flow, improved refinancing math, and selective value recovery as 2026 approaches.

Multifamily has been the first sector to respond to the Fed’s pivot. Apartment yields, after climbing steadily since 2022, have begun to edge down. CBRE expects cap rates to compress by roughly 25 basis points from their peak by year-end, reflecting improved investor sentiment. Green Street’s property index has already shown apartments leading a modest rebound, with values up about 3 percent year-to-date.

The investment market, though still subdued, is thawing. Cross-border capital has increased exposure to U.S. apartments, and regional banks — long the sector’s key lenders — have cautiously resumed activity. Government-sponsored enterprises remain reliable providers of debt, anchoring liquidity and helping bridge deals where other lenders remain hesitant. Mortgage rates for stabilized properties, which exceeded 6 percent earlier this year, have slipped back into the mid-5s, restoring coverage ratios and improving refinancing prospects.

The challenge is supply. More than half a million new units delivered in 2024, the largest wave in modern history. Early 2025 added nearly 100,000 more units in just the first quarter. Vacancies rose in Sun Belt markets where development was heaviest, pressuring rents and forcing concessions. Yet construction starts have collapsed, and lease-up velocity is improving — nearly half of new units were absorbed within three months in Q1 2025. The supply bulge will take time to digest, but by late 2026, the pipeline should thin enough to restore balance. Multifamily remains better positioned than most asset classes to navigate the refinancing wall, thanks to agency support and continued tenant demand, but geography will determine winners and losers.

The office sector continues to face its most severe reset in decades. Values are down between 30 and 40 percent from their peak, and although cap rates have plateaued, any compression is expected to be minimal. The Fed’s rate cut offers incremental relief but cannot by itself reverse structural shifts in tenant demand.

Transactions remain limited, confined largely to trophy assets with strong tenants or distressed sales forced by lenders. In Manhattan, Washington, and San Francisco, high-quality towers have attracted selective buyers, but commodity office buildings still languish without bids. Development has ground to a halt: new groundbreakings are at record lows, and most of the remaining pipeline is either build-to-suit or conversion projects. This freeze in supply, combined with the gradual withdrawal of obsolete stock, may help rebalance fundamentals over time, but leasing remains the critical variable.

Early signs of stabilization are emerging. Net absorption has turned positive in select markets, sublease space appears to have peaked, and keycard data show incremental increases in office use. Prime buildings are seeing renewed tour activity and even occasional bidding for move-in-ready suites. Yet national vacancy remains near 19 percent, and tenant decision cycles are longer than before. The refinancing challenge is more acute here than anywhere else except hospitality: nearly a quarter of office debt matures in 2025, much of it tied to assets worth significantly less than when loans were originated. Extend-and-pretend strategies are buying time, but a wave of restructurings, discounted payoffs, and foreclosures is inevitable. For office, the Fed’s pivot may slow the bleeding, but the true recovery will depend on tenants, not rates.

Industrial real estate continues to stand out as the cycle’s relative winner. After correcting by about 15 percent in 2022–23, values are climbing again as investors return. CBRE projects cap rates will compress by as much as 40 basis points into late 2025, led by infill and small-bay assets that remain supply constrained. Large distribution facilities have seen vacancies rise into double digits as late-cycle projects delivered, but small-bay vacancy remains below 5 percent, ensuring intense competition and premium pricing in urban logistics nodes.

Deal activity is rising, with cross-border investors, private equity funds, and REITs re-entering aggressively. The construction pipeline is shrinking fast: developers shelved speculative projects when financing costs spiked, and completions will fall meaningfully in 2026. Tenant demand remains structurally strong, driven by e-commerce growth, supply chain reconfiguration, and nearshoring of manufacturing. Rent growth has slowed to single digits from the double-digit surges of 2021 but remains positive across most markets.

Refinancing pressures are manageable. Many loans maturing in 2025 were originated five to seven years ago at much lower rents; today’s higher net operating income offsets the drag of higher interest rates. Lenders prefer industrial and are expanding allocations accordingly. For investors, the sector represents the clearest opportunity to buy into strength, with fundamentals intact and pricing now supported by a cheaper cost of capital.

Retail, long considered a laggard, has become one of the more resilient segments of the CRE landscape. After a modest correction in 2022, values have stabilized and in some cases risen. Grocery-anchored centers and necessity retail are trading at cap rates 25 to 50 basis points tighter than a year ago. National vacancy hovers near record lows of 5–6 percent, reflecting the near absence of new supply. Developers have not meaningfully added retail space in over a decade, and many obsolete malls have been redeveloped or demolished, effectively shrinking the sector’s footprint.

Tenant demand is steady, with grocery, discount, fitness, and medical uses driving absorption. Power centers are experiencing renewed interest, and even high street retail in prime urban corridors is regaining momentum. Banks have re-opened to retail faster than to other sectors, with retail loan originations rising by more than a third over the past year. For investors, retail offers stable cash flows and modest but steady rent growth, with far less refinancing risk than office or hotels.

The hotel sector has returned to pre-pandemic revenue levels, with RevPAR up about 2 percent year-to-date and luxury and urban markets leading. Average daily rates remain elevated, and group and business travel have strengthened. Yet profitability is under pressure. Labor shortages, wage inflation, and soaring insurance costs are compressing margins, even as top-line revenue grows.

Investment activity is accelerating. High-quality resorts and branded urban hotels are trading at strong pricing, while weaker select-service assets are changing hands at deep discounts. Private equity is targeting both trophy acquisitions and distressed opportunities. The development pipeline remains muted, with most new rooms coming in the extended-stay or limited-service segments.

Refinancing is the sector’s biggest challenge. More than a third of hotel mortgage balances mature in 2025, the highest share of any asset class. Loans originated at 4 percent interest and 70 percent leverage now face refinancing at 7 percent and lower proceeds. Many owners will be forced to inject equity, restructure debt, or sell. Lenders are selectively extending maturities, but distressed sales and ownership turnover will be a defining feature of the next 12–18 months.

Across the industry, refinancing and recapitalization define the 2025 agenda. Nearly $1 trillion in CRE debt matures this year, including over $150 billion in private-label CMBS. While the Fed’s pivot lowers base rates, spreads remain wide, and underwriting standards conservative. Banks and life insurers continue to favor multifamily, industrial, and necessity retail, while office and hotels remain marginalized. Debt funds, mezzanine lenders, and private equity are stepping into the gap, often at high cost but with flexible structures.

Mortgage coupons have eased back into the mid-5s for stabilized multifamily, industrial, and retail assets. Office loans remain priced in the 6s and 7s, while hotels face rates as high as 9 percent. In most cases, refinancing is possible but requires additional equity or reduced leverage. As more cuts filter through, the refinancing math should improve incrementally, but capital discipline will remain essential. Extensions, modifications, and recapitalizations will outnumber foreclosures, but distressed sales will still emerge where fundamentals are weakest.

The September rate cut is best understood as a release valve rather than a rescue. It marks the end of the tightening era and the beginning of a new phase defined by selective recovery. Multifamily, industrial, and retail are positioned to benefit first, with values stabilizing, liquidity improving, and cap rates compressing modestly. Office and hotels face more fundamental challenges that interest rate relief alone cannot solve, but even in those sectors, the Fed’s pivot reduces downside pressure and creates a platform for restructuring.

By early 2026, the CRE market should look more dynamic than it has in years: transaction volumes will rise, refinancing pressures will ease, and capital will flow more confidently into sectors with strong fundamentals. The path will not be uniform — asset selection and sector strategy will be decisive. For investors and operators, the opportunity lies in moving early, locking in lower debt costs, and recapitalizing where values have already reset. The Fed has opened the door to the next cycle. Execution will decide who walks through it.

1. Federal Reserve Board. FOMC Statement, September 17, 2025.
https://www.federalreserve.gov/newsevents/pressreleases/monetary20250917a.htm

2. Reuters. “Fed cuts rates by quarter of a percentage point, signals more cuts ahead.” September 17, 2025.
https://www.reuters.com/business/fed-lowers-interest-rates-signals-more-cuts-ahead-miran-dissents-2025-09-17/

3. CBRE. U.S. Cap Rate Survey H1 2025.
https://www.cbre.com/insights/reports/us-cap-rate-survey-h1-2025

4. Green Street. Commercial Property Price Index (CPPI) — All-Property.
https://www.greenstreet.com/insights/CPPI