Interest Rates, Policy Uncertainty Weigh on CRE: ValTrends Webinar 3Q 2025

Heading into the third quarter, rising inflation, persistently high interest rates and uncertainty over tariff policies are shaping commercial real estate (CRE) investment trends — with ripple effects on transaction volume, foreign investment and sector preferences. That’s according to the “ValTrends First Look” webinar held July 22, hosted by Peter Muoio, PhD, Senior Director, SitusAMC Insights, and Jennifer Rasmussen, PhD, Vice President, SitusAMC Insights. 

The session noted a connection between rising policy-related uncertainty and shifting investor sentiment. “Uncertainty can have very important impacts on the economy and on investor and lender behavior,” Muoio said. 

Economic Uncertainty Surges Past COVID-Era Highs 

The U.S. Economic Uncertainty Index spiked to an all-time high in April, surpassing levels seen during the COVID-19 pandemic. The surge was triggered by the Trump administration’s tariff announcements. “The good news is, since that April jump, we've started to see the index come back toward the ground in May and June—though it still remains relatively high compared to historical data,” Muoio said. 

Meanwhile, the U.S. economy has shown resilience. Monthly job growth averaged 150,000, while first-quarter gross domestic product (GDP) dipped slightly, driven by a pullback in imports and an uptick in inventories ahead of proposed tariff implementation. “A lot of one-off or special things were going on with the GDP number,” Muoio said. “Businesses and consumers were pulling in imports and putting them into inventory in anticipation of tariffs.” 

Inflation has picked up again, with both headline and core consumer price indexes on the rise. Coupled with a strong June employment report, this has put pressure on bond markets and constrained the Federal Reserve’s ability to ease interest rates. The 10-Year Treasury yield continued a slow upward climb through the quarter. 

CRE Still Seen as a Safe Haven—But Holding Strategy Prevails 

CRE tied with equities as the preferred asset class among institutional investors, edging out bonds and cash. “There’s a preference for CRE as a relatively safe haven compared to volatility in other segments,” Muoio said. “But the expectation that easing would drive more deal flow has stalled, as policy developments reversed sentiment.” 

Survey results show a clear shift toward caution: 76% of investors said they prefer to hold assets, while just 18% said they would rather buy and 6% favored selling.  

Despite the conservative posture, capital availability is increasing. Debt and equity markets are loosening slightly, as investors face mounting challenges in deploying capital. “Dry powder has actually been trending down because of the difficulties of doing deals in this environment,” Muoio said. “There’s a lot of money burning holes in pockets, and investors want to put that money to work—but the opportunities just haven’t materialized.” 

Transaction Volume Slows, Led by Declines in Multifamily 

CRE deal activity continued its downward slide. According to MSCI Real Assets, transaction volume fell to just $28 billion in May—the slowest month in the past year. A December 2024 spike due to year-end closings was followed by a steady monthly declines. The biggest contributor to the drop: multifamily transactions. “That volume fell off significantly in May,” Muoio noted. “At the same time, we saw a slight increase in industrial deals.” 

Sector Preferences Shift as Multifamily Reels from Oversupply 

While apartment and industrial remain the top sectors investor preference for multifamily dropped notably—down to 47% in the second quarter, from 71% in the first quarter. Retail slipped from the higher ground it enjoyed last year, and office continues to languish at the bottom of investor rankings. 

The broader market is showing signs of price stabilization. SitusAMC Insights tracks 16 property types, including subtypes and alternatives. Ten of those posted stable cap rates quarter over quarter. Modest cap-rate compression was seen in data centers, industrial R&D, regional malls and student housing. 

Industrial property values remained steady month over month, but apartment prices declined 0.7%—the sharpest drop across sectors. “Apartment is still reeling from oversupply and the exuberant pricing of 2021 and 2022,” Rasmussen said. Office and retail prices also slipped slightly. 

Foreign Investment Cools Amid Regulatory Crackdown 

Investor sentiment toward U.S. real estate is being shaped by new policy initiatives targeting foreign ownership. A recent survey showed 59% of respondents reported a modest or significant decline in foreign appetite for U.S. CRE. 

“This could intensify liquidity pressures, especially in gateway markets that rely heavily on international capital,” Rasmussen said. “There’s a lot of ongoing legislation at both the federal and state levels that aims to limit or ban foreign investment in real estate. Even if the focus is mostly on land and agricultural properties, it’s creating skittishness among international investors more broadly.” 

The webinar also offered forecasts for key property sectors, including office, retail, industrial and apartment, and examined trends in delinquencies and special servicing. View the ValTrends Look Ahead webinar presentation here. Our 25-page ValTrends report will come out at the end of the quarter. Subscribe to be notified as soon as the report is available, and we'll send a link to download it for free. For more information on SitusAMC Insight’s research, analytical tools or data products, visit our website.