Market Summary 9.15.25

CRE at a Crossroads: Jobs, Rates and Market Liquidity

The labor market is beginning to show signs of weakness, with job creation slowing sharply in recent months and prior growth revised downward by nearly a million positions. This trend raises the likelihood that the Federal Reserve will soon begin cutting rates to support employment, with expectations pointing to as much as 75 basis points of easing by year end. Long-term rates have already begun to adjust, with the 10-Year Treasury yield falling to around 4%, lowering borrowing costs across many commercial real estate sectors.

However, the relationship between Fed policy and cap rates is far from direct. While lower short-term rates can reduce financing costs, long-term yields often move independently, and valuations hinge more on liquidity and transaction activity than on the Fed’s moves alone. Over the past few years, cap rates have expanded by 80 to 130 basis points, meaning price discovery still depends on whether sellers bring assets to market at levels that align with current investor return requirements.

Looking ahead, softer employment trends and easing interest rates could help unlock pent-up demand, particularly with nearly $1 trillion of CRE debt maturing in 2025 and a significant amount of dry powder waiting to be deployed. If financing conditions continue to improve, transaction velocity could pick up, creating the potential for cap rate compression in select segments.

For investors, this environment presents a narrow but important window. As rates begin to move lower, there may be a short period where borrowing costs improve before valuations fully adjust. Acting during this transitional phase could allow buyers to capture well-located, resilient assets at favorable pricing before competition intensifies and liquidity pushes values higher. Long-term success will depend on focusing on fundamentals—targeting markets with strong demand drivers and properties positioned to benefit from improving capital flows.