What’s going on
As of late October 2025, the Federal Reserve (the Fed) lowered its benchmark federal funds rate by a quarter percentage point to a target range of 3.75%–4.00%.
According to Ellsbury Group, the central bank’s decision reflects a balancing act: while the economy continues to expand, job gains have slowed and inflation remains “somewhat elevated.”
Short-term Treasury yields, other market rates, etc., are reflecting this environment; for example, the 10-year Treasury yield is roughly ~4.00%.
Key observations
The Fed’s move signals a cautious shift toward easing, but with a degree of uncertainty: Chair Jerome Powell indicated that further cuts this year are not guaranteed.
The yield curve remains under pressure: higher borrowing costs persist for many durations, and the cost of capital remains elevated relative to the past decade’s “ultra-low” era.
Inflation remains a wild card. Although it has moderated from its peak, “somewhat elevated” inflation means real rates are still higher for many asset buyers and borrowers.
Because CRE/IRE financing is particularly interest-sensitive (large debt burdens, long maturities, floating rate components, rollover risk), shifts in the interest-rate market matter a lot.
How interest rates affect commercial & investment real estate
Here’s how the current rate backdrop is influencing the CRE/IRE sector — and what to watch.
1. Cost of debt financing
Higher interest rates translate directly into higher borrowing costs. For a property investor or developer:
If you borrow to acquire or develop a building, your debt service is higher.
If rates go up after you commit, the incremental cost squeezes returns.
Even if you locked in debt some time ago, many deals have floating-rate or variable components (or refinancing risk) which means you may face higher rates.
Because many CRE valuations are modeled on “cap rates” (capitalization rates = net operating income / value) plus debt service, higher debt costs tend to reduce property valuations (or require higher NOI to maintain the same valuation).
2. Valuation & cap-rate compression/expansion
Interest rates affect the required return hurdle (discount rate) in CRE/investment real estate. When rates rise:
Investors may demand higher cap rates (i.e., lower valuations) to compensate for increased risk and cost of capital.
That means the same cash-flow property may sell for less today than it would have when rates were lower.
Conversely, when rates decline (or are expected to decline), cap rates may compress (valuations go up) if property risk remains constant.
In the current environment: even though the Fed cut the rate slightly, the base rates are still elevated by historical standards. Investors may remain cautious, potentially keeping cap rates higher than they were during the low-rate era.
3. Refinancing & rollover risk
Many CRE deals—and especially investment properties—are subject to refinancing risk. For example:
A loan maturing in 3–5 years may need to be refinanced at current market rates. If rates are higher, the new debt service could be significantly greater.
Some debt may have a balloon payment, or floating rate resets tied to some index plus margin; floating component means rising rates directly increase cost.
If a property’s income doesn’t grow enough to cover the higher debt cost, the investor may face trouble (cash flow squeeze, refinancing shortfall, lower property value).
Given the current environment of still-elevated rates and uncertainty about further cuts, refinancing risk is becoming more salient.
4. Property sector performance & asset-class differentiation
Not all sectors of CRE respond the same way to rate movements. For example:
Office properties are under particular pressure (structural headwinds such as remote/hybrid work) and higher rates only exacerbate challenges (since cost of debt and required returns rise).
Industrial/logistics assets may fare better (strong fundamentals) – but even they must absorb higher capital costs.
Multifamily residential often has relatively stable cash flows, but with apartment supply, rent growth limitations, and cost pressures, the margin for error narrows when borrowing costs are high.
Retail and hospitality are even more rate-sensitive because they are more cyclical, so higher rates can amplify downside risk.
Thus, the rate environment forces investors to be more selective not just on property type but also on location, lease structure, tenant credit quality, and lease duration.
5. Equity investor behavior & leverage levels
When debt becomes more expensive, equity investors shift behaviour:
They may reduce leverage (use less debt) to avoid risk, which reduces potential upside but also reduces risk of downside.
They may demand higher yields (return on equity) to compensate.
Some transaction volumes may slow because the math no longer works under higher cost of capital. That can reduce liquidity in the market and widen spreads between buyers and sellers.
Some investors may exit or de-leverage, particularly those who acquired under much lower rates and must now compete with higher-cost capital.
6. Impact on new development & value-add deals
For developers and value-add investors, higher rates increase hurdles:
The cost of construction loans or bridge/term debt is higher, reducing margin.
If holding periods or exit assumptions lengthen, the cost of capital eats into feasibility.
Higher rates may delay new supply, which could eventually benefit stabilized assets (less competition), but during the build-out phase the financing burden is heavier.
Value-add plays often count on refinancing at better terms or selling at cap-rate compression — if neither happens, returns suffer.
What this means right now & looking ahead
Current practical take-aways for investors
If you’re acquiring or holding CRE/IRE: check your debt maturity schedule, floating vs fixed rate components, and refinancing risk. If a large loan matures soon and the rate environment is uncertain, you may face higher financing cost or reduced flexibility.
Run sensitivity analysis on your deal: simulate scenarios where interest rates rise further or income growth falters. What happens to your debt service coverage ratio (DSCR), equity return, cash flow?
Focus on lease duration, tenant credit quality, inflation‐linked rent growth as tools to offset risk. The more stable and inflation-hedged the cash flow, the better you’ll withstand higher rates.
Consider lower‐leverage strategies or locked‐in fixed‐rate debt where possible to reduce risk. In a high-rate environment, the benefit of low leverage becomes more obvious.
Monitor cap-rate trends: if cap rates are rising in your target market, valuations may come down or at least transaction pricing may soften. That may create opportunities (if you’re patient) or risks (if you hold highly leveraged assets).
Looking ahead: what to watch
The path of inflation: if inflation remains sticky or rises, the Fed may refrain from cuts (or even reverse course/hike), which would keep rates high or push them higher.
Economic growth & employment: If the labor market weakens significantly or growth slows, the Fed may cut more aggressively — which could relieve rate pressure and help CRE valuations.
Supply vs demand in CRE: If new supply in certain sectors is constrained due to high cost of development or financing risk, that could improve fundamentals for existing properties and offset some rate pain.
Spread between long-term rates and short-term rates (yield curve): A steeper curve could raise long-term borrowing cost; an inverted/flat curve may reflect recession risk and impact investment sentiment.
Refinancing wave: Many CRE loans that originated during low-rate era may be coming due in the next few years — how the refinancing market copes will be key.
Alternative financing: With traditional bank debt more expensive, investors may explore mezzanine debt, preferred equity, private debt, or JV structures — often at higher cost, but possibly more flexibility.
Final thoughts
The interest-rate market matters immensely for commercial and investment real estate. Even though the Fed has started easing, the baseline is still elevated relative to the past decade’s record low environment. That means cost of capital remains a headwind for many investors.
In this context, the margin for error is narrower: If a deal assumed debt at 4% and now you’re paying 6% or 7%, your cash‐flow cushion shrinks. On the flip side, investors who lock in solid fundamentals, predictable cash flows, inflation‐hedged rents, and conservative leverage may still succeed and perhaps even find opportunity amid reduced transaction volume or market dislocation.
For those in the CRE/IRE space, the mantra is: know your debt, stress test your assumptions, lock in what you can, and stay nimble. Rate environments change, and today’s elevated cost of capital could become tomorrow’s tailwind if rates fall — but only if your property is well positioned.
This article is part of Ellsbury Group’s Weekly Market Insights, where our Commercial Real Estate team analyzes current market conditions and their impact on investors, developers, and property owners.
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