3Q 2026 Field Notes: Holding Up Under Interest Rate Pressure

Commercial real estate (CRE) is adjusting to an extended period of elevated interest rates, with Treasury yields approaching 5%—raising concerns around originations, refinancing and future valuations. Despite those pressures, cap rates and property values have generally remained stable, while capital continues to move into the market more selectively.

That’s according to SitusAMC’s Field Notes, which draws on the firm’s extensive touchpoints across the CRE landscape to provide a boots-on-the-ground perspective from professionals across the organization. It offers investors real-time market insights ahead of many traditional CRE data sources. 

SitusAMC Insights’ proprietary data shows durable cash flow and net operating income (NOI) growth are becoming increasingly important drivers of value. Meanwhile, debt capital availability has improved modestly, although lender selectivity and asset-specific risk remain significant factors. Underwriting standards remain relatively restrictive amid higher rates, tighter DSCR requirements and greater scrutiny of cash flow stability and refinancing risk. Equity capital is concentrating on high-quality assets and stronger sponsors, particularly in growth markets.  

Servicing, Asset Management & Advisory: Capital Deployment Picks Up  

Lenders, which previously had large amounts of dry powder, are raising and deploying capital, although interest-rate uncertainty and upcoming Federal Reserve decisions remain important factors for transaction activity. Some of the decline in private credit dry powder may reflect capital being deployed into large loan pool acquisitions rather than new originations. SitusAMC's Asset Management group is seeing increased appetite for loan origination from insurance companies, and particular interest in collateralized loan obligations (CLOs). Meanwhile, more lenders are exploring the use of the Commercial Property Assessed Clean Energy (C-PACE) program to fill the capital stack in lieu of more expensive subordinate debt. The C-PACE program provides low-cost, long-term financing for energy efficiency, water conservation and renewable energy projects.  

SitusAMC’s Advisory Business expects steady activity throughout the remainder of the year, with data centers emerging as a significant source of advisory activity. For example, SitusAMC provided underwriting support for syndicated lenders on four transactions totaling approximately $6 billion across 16 properties. Multifamily presents an increasing source of risk, leading to broader due diligence and enhanced advisory scopes, including agreed-upon procedures (AUPs).

CRE Debt & Securities Valuation: Higher Rates Test Credit Spreads and Loan Values

From a debt-valuation perspective, fixed-rate spreads remain modestly tighter in the third quarter, particularly as the recent backup in the yield curve has not yet been fully reflected in credit spreads. Floating-rate spreads are largely unchanged from the prior period. The increase in the 10-year Treasury yield toward 5% is a key concern, particularly for new loan originations, as higher benchmark rates increase borrowing costs and could weigh on transaction activity.

There is also an important lag effect in valuations: Fixed-rate spreads often tighten initially when Treasury yields rise, but if rates remain elevated, spreads could subsequently widen as the market reprices to the higher-rate environment, creating additional loan-valuation pressure. Despite heightened interest-rate and broader market volatility, activity is growing. Greater market uncertainty or stress could increase demand for independent debt valuation and mark-to-market services, particularly as accounting teams and auditors place greater scrutiny on portfolio valuations.

Special Servicing: Office Remains the Focus

Office remains a significant source of special servicing activity, driven primarily by upcoming loan maturities and a widening divide between stronger and weaker assets and markets. While New York office fundamentals appear comparatively resilient, select assets are still experiencing challenges. The surveillance pipeline indicates that maturity-related stress is likely to remain elevated for at least the next three years, suggesting an extended workout and resolution cycle for office loans. Meanwhile, multifamily is showing increasing signs of weakness, with a growing pipeline for special servicing. Special servicing activity is broadening to specialized property sectors such as life sciences and movie studios, which is showing signs of elevated distress.

Securitizations: CLO Activity Rises

SitusAMC’s Securitization team is seeing strong activity, with CRE CLO issuance already surpassing last year’s full-year levels in both deal count and total pool balance. Additional transactions from repeat issuers are expected to push volumes meaningfully higher. While activity moderated from the second to third quarter, the slowdown is consistent with typical summer seasonality. Single-asset conduit issuance is also running ahead of last year’s YTD pace by both deal count and unpaid principal balance, although it has not yet exceeded last year’s full-year totals. A notable development is the innovative multifamily-only conduit product. These deals complement the five-year conduit product that gained traction following the rise in interest rates. Multifamily-only conduits are generally structured as traditional fixed-rate CMBS, with larger loan balances and standard conduit features such as lockouts, fee sets and rigid prepayment protections, distinguishing them from agency executions and transitional CRE CLOs, which typically feature floating-rate debt, descending prepayment options and future funding.  

The ability to shift between traditional conduits, shorter-duration fixed-rate structures and property-specific pools should improve the market’s capacity to respond to changes in investor demand and market volatility. Looking ahead, issuance is expected to accelerate, while the eventual repayment and refinancing of five-year conduit loans, originated beginning in 2023, could become an increasingly important market consideration in 2028.

CRE Equity Valuation Trends: Fundamentals Drive Returns

CRE cap rates have remained largely stable during the third quarter, with property fundamentals, rather than cap rate movement, serving as the primary driver of returns. While the 10-year Treasury yield has remained elevated above 4.5% and recently approached 5%, creating a potential headwind for CRE values, market participants have not yet observed meaningful pricing deterioration in transaction activity or underwriting assumptions.  

If the current higher-for-longer interest rate environment persists, there may be positive impact on debt mark-to-market total return performance. However, this is unlikely to be sustainable without some degree of eventual property value repricing, potentially becoming more apparent later in the year or into 2027.  

Capital continues to flow toward sectors and markets exhibiting durable income growth and opportunity to grow NOI, even if it is in the longer term. Moderating supply conditions across several property types are presenting tailwinds. Technology and AI-related demand are driving performance, particularly in San Francisco. Retail remains one of the most consistent performers and alternative sectors, such as senior housing, data centers, and manufactured housing, are strong.  

Multifamily: Bay Area Market Is a Standout  

Property values were flat-to-slightly up in the third quarter, with performance driven by cash-flow growth rather than cap-rate compression. It remains to be seen if higher interest rates will translate into higher cap rates. San Francisco and the broader Bay Area have emerged as standout markets, benefiting from strong technology and AI-driven demand, limited new supply, and ease trade-outs of 20% to 30%. Investors are coming back into the market aggressively in San Francisco, with some sales pricing 10% to 20% higher than already aggressive appraised values.

The Midwest also remains resilient, supported by favorable supply-demand dynamics. In contrast, Denver is among the softest markets due to persistent oversupply, reflected in negative lease trade-outs. Austin remains a market to watch, as elevated supply continues to weigh on fundamentals. However, some positive signs there include improving absorption, rising occupancy and strong new lease trade-outs, though this is asset- and submarket-specific.  

Industrial: Leasing Performance Remains Uneven

Industrial market conditions remain largely consistent with recent quarters, particularly for Class A product, with transaction activity and leasing volume providing continued support for current valuations, cap rates and investment-return assumptions. Leasing fundamentals, however, remain highly market-specific. Dallas-Fort Worth continues to outperform, benefiting from strong leasing demand and rent growth, while Southern California, particularly Los Angeles and the Inland Empire, appears to be approaching a floor in rents after an extended period of decline. Seattle remains a softer market, with ongoing downward pressure on rents, while New Jersey continues to exhibit strong market transaction activity, but that has yet to fully translate into executed leases. Although leasing momentum has improved in several markets, performance remains uneven, with winners and losers across regions depending on appraised rent growth assumptions and portfolio composition.  

Retail: Investor Demand Rises Amid Solid Cash Flows

Retail remains one of the most favored property types, supported by high occupancy, healthy leasing activity and solid cash flows. Investor demand appears to be increasing as some portfolio managers seek to rebuild retail allocations following reductions made during and after the pandemic. However, quality matters, and the supply of high-quality assets remains limited. In the grocery-anchored subtype, cap rates for top-quality assets in major markets generally remain in the 5% to 6% range, while lower-quality or tertiary-market property cap rates could be up to 200 bps higher.  

The mall sector has also continued to outperform, with major owners reporting strong tenant sales, improved earnings outlooks, and ongoing efforts to enhance the quality of portfolios. Consumer spending trends remain supportive, with retail sales continuing to post solid YoY growth despite some month-to-month volatility.  

Office Conditions Continue to Improve  

From a valuation perspective, office conditions continue to improve, particularly for Class A and trophy assets in markets such as New York City, San Francisco and Silicon Valley, where AI-related tenants are driving significant leasing demand and absorbing large blocks of space. Manhattan specifically has a dearth of large block space and landlords are garnering healthy premiums to market levels for those highly sought-after spaces.

Transaction activity is on the rise. Though institutional investors are still net sellers, they are becoming more active in office, particularly for properties with a value-add play. Capital is available and lenders are working with owners on refinancing options. Approximately 16% of office assets remain distressed, and lower-quality Class B properties continue to face write-downs. Slower recovery is being seen in Washington, D.C., Chicago, Denver, Portland.  

Los Angeles is showing early signs of improvement. Many of the conservative leasing assumptions adopted during the pandemic are continuing to reverse. Renewal probabilities and stabilized occupancy assumptions are increasing for well-performing assets, particularly Class A properties in markets such as New York and, more recently, San Francisco. Value growth is being driven primarily by rising market rents, increased occupancy and rent-roll improvements, with the strongest gains occurring in New York, San Francisco, Silicon Valley and select Southeast markets. Washington, D.C. and Chicago are starting to see positive rent growth, though it remains asset- and submarket-dependent. However, tenant improvement (TI) packages and free rent concessions remain elevated. Cap rates have generally remained stable and values are trending modestly higher supported by improving operating fundamentals.  

Life science remains under pressure, with declining market rents, elevated TI packages, generous free-rent concessions, and weakening occupancy levels continuing to weigh on performance. While there are early signs that the sector may be approaching a bottom, including indications of renewed leasing activity, current market conditions have not yet been fully reflected in valuations. Additional downward adjustments may still lie ahead. The weakness has prompted some landlords to reposition life science space back to traditional office use. As a result, life science properties are generally experiencing value declines of approximately 1% to 2% during the quarter.

Senior & Student Housing Outperform

Senior housing continues to deliver strong performance, though not as robust as recent quarters, with high occupancy and steadily increasing rents. After several quarters of large movements in investment rates and rent growth, the third quarter saw some adjustments to rents based on current leasing trends and the latest operating statements.

Performance has become more property-specific rather than broad-based; there were little portfolio-wide changes. Market performance remains favorable across most regions, particularly in the Sun Belt and other supply-constrained markets. Even markets with new supply coming online are easily absorbing inventory due to the growing senior population.

Student housing is overperforming, with rents up more than 3% in some instances, driven by exceptionally strong pre-leasing activity. The East Coast markets tracked by SitusAMC achieved pre-leasing levels ranging from the mid-80% range to nearly full occupancy, with many assets reaching between 90% and 100%. This strong demand and the associated sizable increases in rent have led to healthy gains to valuations. Strong third-quarter performance aligns with the seasonal leasing cycle typical of student housing.

Self-Storage Rents Rise  

Self-storage fundamentals showed continued improvement during the quarter, supported by healthy summer leasing activity and a return to positive rent growth. Notably, move-in rental rates were positive YoY, reversing the trend over the past two years. Revenue growth is being driven not only by new leasing activity but also by aggressive rent increases for existing tenants, with major self-storage REITs raising guidance for in-place customer rate increases to nearly 20%. There are pockets of oversupply throughout the country, particularly in the Southwest and Mountain regions. As these supply pressures gradually subside, the sector is expected to return to its historical pattern of 3% to 5% annual NOI growth.  

Single-Family Rentals Activity Muted Following Road to Housing Act

The most significant single-family rental (SFR) development over the quarter was the passage of the Road to Housing Act, which restricts institutional purchases of single-family homes while preserving key exemptions for build-to-rent (BTR) and build-to-renovate strategies. The legislation is intended to improve housing affordability without discouraging institutional investment that contributes to housing supply. Since its enactment, transaction activity has remained relatively muted, with the market entering a period of price discovery. However, there has been an increase in one-off sales, with the number of listings doubling over the past six months, as investors have been forced to pivot toward BTR strategies, if they had not done so already.

Recent transactions have generally traded at cap rates in the high-4% to mid-5% range, although limited deal flow makes broader pricing trends difficult to assess. Despite the slowdown in transactions, underlying property fundamentals remain strong, with positive rent growth, high tenant retention and a significant affordability advantage for renting versus homeownership, given elevated mortgage rates. As a result, SFR values are expected to remain flat-to-up. The second half of the year will be critical in determining how the new legislation influences transaction volumes, investor behavior and new construction activity.

Manufactured housing fundamentals remain very strong, with communities continuing to achieve rent growth and new lease rates that exceed prior peak levels. However, the rapid increase in market rents has created a widening gap between in-place rents and market rents, in some cases reaching 50% to 60%, which limits near-term revenue growth. Value creation is increasingly dependent on operators’ ability to strategically reposition the rent roll, particularly by turning over lower-rent pads and gradually bringing rents closer to market levels.  

Download our latest ValTrends report, “Meeting of the Minds” for key insights on market conditions, capital dynamics and more. https://www.situsamc.com/valtrends2q26. Learn more about SitusAMC Insights’ research, analytical tools or RERC data products on our website.