Why Lower Rates Alone Won’t Revive Commercial Real Estate
by: Cole Cornett
For much of the past year, the commercial real estate (CRE) market has looked to the Federal Reserve for long anticipated rate cuts, hoping lower rates would reduce borrowing costs, lift asset values, and restart transaction activity. Yet the CRE market is far too large, interconnected, and dependent on lender behavior for policy shifts alone to drive a meaningful recovery. According to Clarion Partners, the U.S. CRE ecosystem totals $26.8 trillion in value, with roughly $11.7 trillion considered institutionally investable and nearly $6 trillion in outstanding debt. At this scale, monetary policy cannot quickly realign liquidity, narrow credit spreads, or repair asset level fundamentals. Rate cuts may support sentiment, but real recovery depends on three forces moving together, lender confidence, spread compression, and asset performance. Until these align, lower policy rates will not generate a sustainable rebound, and Lever Capital Partners helps clients understand these dynamics so they can make decisions based on real market drivers, not policy headlines.
Financing Assumptions Are Misaligned
Many investors underwrote acquisitions and developments assuming multiple Fed cuts would materially lower the cost of capital. However, even as policy rates ease, borrowing conditions remain tight.
PGIM reports that average spreads for stabilized office and industrial loans in Q3 2025 hovered around +197 bps over benchmarks, compared with spreads 50 to 100 bps tighter in 2018 to 2019. These wider spreads have absorbed much of the benefit of a lower base rate. As a result, all in loan coupons remain elevated. According to DRK Realty, core CRE loans in 2024 generally priced between 5.3 percent and 5.5 percent, up from roughly 4 percent the prior year, reflecting risk premiums rather than monetary policy.
Underwriting standards have also tightened. EisnerAmper reports that average office LTVs declined from roughly 65 percent in 2021 to about 47 percent by 2023, materially reducing loan proceeds. Higher DSCR requirements further constrain leverage, causing many previously feasible deals to no longer pencil. Investor assumptions from 2022 to 2023 have therefore diverged sharply from lender realities, with spreads and credit discipline, not Fed actions, determining loan terms.
The Buyer and Seller Disconnect Persists
Even with modest rate relief, buyers and sellers remain divided on valuation. Altus Group reports that U.S. CRE transaction volume reached $369.8 billion in 2024, only slightly below 2023 levels. While Q4 2024 delivered $108.5 billion in trades, a 33.6 percent increase from Q3, pricing expectations remain far apart.
Many sellers interpret early rate cuts as support for firm or higher valuations. Buyers, however, continue to wait for clearer evidence of stabilized financing markets, narrowing spreads, and reduced rate volatility. As a result, cap rates remain sticky and price discovery lags, with perceived liquidity and macro uncertainty influencing negotiations as much as projected income growth.
Liquidity, Not Policy, Drives Recovery
While rate cuts can support momentum, liquidity ultimately drives the CRE market. The Mortgage Bankers Association reports that total CRE borrowing and lending increased 16 percent in 2024 to approximately $498 billion, yet activity remains well below peak levels. Meanwhile, the St. Louis Fed notes that delinquency rates climbed to 1.57 percent, the highest level in more than a decade, representing over $47 billion in stressed loans.
An even greater challenge is the 2025 maturity wall. Kaplan Collection Agency estimates that $957 billion in CRE loans will mature in 2025, nearly three times the long term average. This refinancing pressure keeps lenders cautious regardless of Fed policy direction. Until lenders regain confidence in asset performance and valuation stability, lower rates will not automatically translate into higher leverage or tighter spreads. Rate cuts may help sentiment, but recovery begins only when lenders believe cash flows are durable and valuations predictable, allowing liquidity to return and spreads to compress.
How Lever Capital Partners Supports Clients
In a market where optimism often moves faster than fundamentals, Lever Capital Partners provides a grounded perspective. With relationships across banks, life companies, debt funds, private credit providers, and alternative capital sources, Lever helps clients navigate real time credit conditions. By assessing spreads, liquidity trends, maturity risk, and lender appetite, Lever structures capital solutions aligned with the true cost and availability of debt today.
Sources:
https://www.clarionpartners.com/insights/us-cre-investable-universe
https://www.stlouisfed.org/on-the-economy/2024/may/commercial-real-estate-in-focus
https://www.eisneramper.com/insights/real-estate/commercial-real-estate-outlook-0124
https://www.altusgroup.com/insights/us-cre-transactions-q4-2024
https://agorareal.com/blog/commercial-real-estate-lending-trends