Investors Focused on CRE Despite Rising Rates, Sluggish Activity: ValTrends Webinar, 4Q 2026

Commercial real estate (CRE) investors are showing renewed interest in acquisitions as capital discipline eases and property values begin to stabilize. Yet elevated interest rates, persistent inflation and uneven sector performance continue to complicate the recovery. Those were among the key takeaways from the latest ValTrends First Look webinar held October 20, led by Peter Muoio, PhD, Senior Director, SitusAMC Insights, and Jen Rasmussen, PhD, Vice President, SitusAMC Insights. 

The presentation examined the economic outlook, investor sentiment, capital markets conditions, transaction activity and property-level fundamentals. While growing investor interest and improving conditions in select sectors offer encouraging signs, higher borrowing costs and continued uncertainty are limiting a broader market recovery. 

Labor Market Weakens as Inflation Accelerates 

The U.S. economy grew 2.2% in the second quarter, below its 10-year average of 2.7%, as increases in consumer spending, exports and fixed investment were partially offset by imports. Employment growth remains weak: Nonfarm payrolls increased just 29,000 in September, following a revised gain of 133,000 in August and a loss of 10,000 in July. July and August figures were revised downward by a combined 60,000 jobs. 

Over the past year, employment growth has averaged just 44,000 jobs per month, compared with nearly 120,000 over the past decade and more than 93,000 over the past 20 years. The unemployment rate increased to 4.2%, while labor force participation rose 20 basis points, breaking an almost yearlong pattern of declines. 

Inflation presents another challenge. The producer price index (PPI) increased 6.3% year over year in September, its largest increase since March 2022, while consumer price index (CPI) inflation reached 3.7%, exceeding expectations. 

“The Iran War, disruptions to shipping through the Strait of Hormuz and higher energy costs continue to drive inflationary pressures,” Muoio noted. “Persistent increases in oil, gasoline, diesel and aviation fuel prices could increasingly filter through to consumer prices, complicating the Federal Reserve's efforts to contain inflation.” 

Long-Term Interest Rates Face Additional Pressure 

Long-term Treasury yields remain elevated as investors demand higher compensation for holding government debt. Term premiums have reached their highest levels in a decade amid growing concerns about federal deficits, government borrowing and heavy Treasury issuance. At the same time, substantial investment in artificial intelligence (AI) infrastructure is competing with government bonds for investor capital. 

"All of this is pushing long rates up, and with them, commercial real estate and multifamily borrowing rates are moving in tandem," Muoio said, noting that these pressures are complicating the outlook for interest rate relief in the near term. 

CRE Maintains Its Lead in Investor Preferences 

Despite a slight decline in its third-quarter rating, CRE remained the top-ranked investment alternative in SitusAMC's proprietary investor survey for the second consecutive quarter. Investors continue to favor the asset class for its stable income returns, maintaining the stronger sentiment toward CRE that has prevailed for much of the past two years. 

Stocks ranked second, although their preference rating declined. Investors cited AI-related investment as a driver of technology stock performance while noting that many other sectors continue to lag. Bonds and cash tied for last place, despite improvements in their quarterly ratings. 

Investor recommendations also shifted toward acquisitions. The share recommending a "buy" strategy jumped from 15% to 24%, bringing the rating close to its 10-year average. Increased interest was concentrated in niche sectors, particularly affordable housing, medical office and self-storage. Office also registered stronger buy sentiment. 

Meanwhile, "hold" remained the dominant recommendation for nearly seven consecutive years, although its share declined from 71% to 66%. 

Capital Discipline Loosens, but Availability Remains Uneven 

Debt and equity capital discipline continued to ease during the third quarter. Debt capital discipline reached its least conservative level since 2015, although debt availability declined to its lowest level in a year and remained slightly below its long-term average. 

Financing conditions vary considerably by property type and borrower. Capital remains plentiful for multifamily and industrial assets but is considerably more limited for commodity office properties and distressed or transitional assets. 

"Underwriting standards are relaxed for large sponsors and well-capitalized institutional investors as lenders compete more aggressively for top-quality deals," Muoio said. 

Many lenders also believe the worst of the valuation declines are behind the market, supporting expectations for gradually improving refinancing conditions over the next several years. However, financing remains more disciplined for weaker assets and less-established borrowers. 

Large Merger Distorts Transaction Volume 

CRE transaction activity appeared to surge in the latest MSCI Real Assets data, increasing 27%. However, the headline figure was heavily influenced by a single large transaction. 

Multifamily deal volume nearly quintupled to $80.5 billion, but approximately $70 billion came from the merger of AvalonBay and Equity. Excluding that entity-level transaction, apartment volume would have declined 40.5%, while overall CRE transaction activity would have fallen 26%. 

Other sectors also experienced declines. Retail transaction volume fell 43%, followed by office at 32% and industrial at 2%. Office and retail volumes remained well below their long-term averages, while industrial activity exceeded its historical average. 

The figures illustrate the continued weakness in underlying transaction activity despite improving investor sentiment and greater willingness to deploy capital. 

Cap Rates Rise as Treasury Yields Compress Spreads 

Third-quarter cap rates increased across all major property types except retail, which held steady at 6.9% for the third consecutive quarter. 

Office cap rates rose 20 basis points, reversing a 20-basis-point decline in the previous quarter. Industrial cap rates also increased 20 basis points, reaching their highest level in more than two years. Multifamily cap rates increased 10 basis points. All four major sectors remained above their long-term cap rate averages. 

Despite these increases, a larger rise in 10-year Treasury yields compressed cap rate spreads across every sector. Multifamily, retail and industrial spreads reached their lowest levels since 2007, while office spreads fell to a three-year low. 

SitusAMC's investor survey found that most respondents had made little or no adjustment to their cap rate assumptions following the Federal Reserve's September rate hike. Many indicated that the increase had already been anticipated and incorporated into pricing. 

Investors also cited insufficient transaction evidence to support significant valuation changes. While higher Treasury yields and borrowing costs could eventually exert upward pressure on cap rates, many market participants are waiting for additional sales data. 

Property prices showed modest improvement. According to MSCI Real Assets, prices increased across all major sectors except apartments in August. Office recorded the strongest gain at 0.5%, continuing its gradual recovery from previous lows. Industrial prices increased 0.4%, extending a series of monthly gains throughout 2026 and approaching a three-year high. 

Dry Powder Returns Toward Historical Norms 

The amount of uninvested CRE capital relative to transaction activity has declined significantly since peaking in 2023, when the Federal Reserve's aggressive rate hikes sharply reduced deal volume. In 2025, dry powder represented approximately 64% of annual transaction activity. That ratio declined further to 46% in 2026, its lowest level since 2018 and below the 10-year average of 56%. 

"I think the real story here is from that sort of excess of capital on the sidelines to a more normalized way of looking at it," Muoio said, adding that the amount of dry powder available for deals may now be tighter. 

Office-to-Residential Conversions Gain Momentum 

Office-to-residential conversions continue to attract interest as a potential source of additional housing supply, although projects can take years to complete.The pipeline of office-to-apartment conversions, including projects under construction, planned or proposed, increased 8% from the beginning of 2025 to the beginning of 2026. Nearly 24,000 new units entered the pipeline, contributing to a nearly fourfold increase in conversion activity since 2022. 

New York City remains the leading market, with more than 16,000 planned conversions in 2026, nearly twice the total in Washington, D.C., the second-largest market. 

Office buildings account for nearly half of all planned residential conversions. Hotels represent approximately 18%, industrial properties 16% and other property types, including schools, healthcare facilities, retail and government buildings, account for roughly 19%. 

Apartment Fundamentals Poised to Improve as Supply Slows 

Apartment vacancies remain elevated because of excess supply, but SitusAMC's latest forecast anticipates improvement as new construction slows and absorption strengthens. 

Vacancy rates are expected to decline below pandemic-era levels by 2029, supporting accelerating rent growth. Markets such as San Francisco and San Jose could experience stronger rent increases as their new supply pipelines contract. 

The forecast suggests that the current supply imbalance will gradually ease, creating more favorable operating conditions for apartment owners over the next several years. 

Office Space Utilization Remains Below Pre-Pandemic Levels 

Despite return-to-office mandates, office space per worker remains at a record low, declining 0.4% year over year and 5.2% from pre-pandemic levels. "Even though you have these return-to-work mandates, that hybrid model is really what's becoming the most prevalent," Rasmussen said. 

The persistence of hybrid work continues to constrain space requirements, even as office attendance increases. Performance remains highly dependent on location. New York City, for example, is benefiting from increased AI and technology-sector leasing demand. 

Consumer Spending Supports Retail Outlook 

Consumer sentiment remains subdued, but spending data suggest households are continuing to support economic activity. According to Bank of America data, consumer debit and credit card spending increased 6.2% year over year in September. Spending growth was relatively broad-based across income groups, rising 5.5% among lower-income households, 4.9% among middle-income households and 4.8% among higher-income households. 

Although the top 5% of households by income continue to drive the fastest spending growth, differences across income groups have narrowed considerably since 2025. 

"The divergences across income cohorts are much smaller than they were in 2025," Rasmussen said. "That points to health in consumer spending, and the economy is not so dependent upon one group." 

SitusAMC expects retail fundamentals to strengthen beginning in 2027 as limited new supply supports occupancy and rent growth. Charlotte and Raleigh stand out as markets benefiting from population growth, healthy employment conditions and constrained retail development. 

Data Center Financing Expands as Industrial Outlook Improves 

AI-driven data center development continues to attract substantial financing across lender types. Commercial banks now hold the largest share of data center debt, including major commitments from international lenders such as Japanese banks. 

According to the data presented, U.S. data centers and related infrastructure carry at least $1.3 trillion in debt. The scale of financing introduces potential risks if AI companies fail to achieve projected revenues or development returns take longer than anticipated. 

"If that happens, from a CRE perspective, it can be hard to retrofit or get new tenants into these very specific buildings," Rasmussen said. 

Meanwhile, SitusAMC's industrial forecast includes the largest upward revision to vacancy expectations among major property types. Nevertheless, industrial fundamentals and rent growth are expected to strengthen over the next several years. 

Los Angeles and Riverside remain challenged by excess supply and negative absorption, illustrating the uneven performance across industrial markets. 

View the ValTrends First Look webinar presentation here. Our 24-page ValTrends report will be published 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.