Rate-Cut Expectations and Sector Divergence Drive CRE in 2Q 2025: SitusAMC Webinar

How are interest rate expectations, valuation spreads, and sector-level fundamentals shaping the outlook for commercial real estate (CRE)? On August 27, SitusAMC’s Real Estate Valuation Services (REVS) team hosted a webinar exploring the latest data and trends, featuring Brian Velky, Global Head of REVS, and Managing Directors Andrew Sabatini and Dane Anderson. Here are the highlights: 

1. Tariffs and Consumer Sentiment Cloud the Macro Backdrop 

Geopolitical tensions and trade policy remain a source of uncertainty, but aren’t having any observable negative impact on price and value. Consumer sentiment continued to weaken even as spending increased, suggesting a potentially bearish signal for inflationary pressures. Panelists noted that this divergence underscores the fragility of demand conditions heading into the last four months of the year. 

2. Public REITs React to Powell’s Jackson Hole Comments 

Public REITs posted a 2.6% gain in the second quarter but trailed the S&P 500, which was lifted by technology stocks. REITs staged a sharp rally following Federal Reserve Chair Jerome Powell’s August speech at Jackson Hole, where his remarks fueled expectations for a September rate cut. Markets now assign a near 90% probability of finishing 2026 with policy rates of at least 100 basis points lower than today. Lower short-term borrowing costs, via the Fed funds rate and its close correlation with SOFR, are expected to ease financing pressures on CRE—particularly for floating-rate borrowers in construction, bridge and private credit loans. 

3. Cap Rates Track Interest Rates, but NOI Growth Provides Cushion 

Analysis of the NCREIF-ODCE index shows a historically tight relationship between cap rates and interest rates, with a correlation upwards of 0.8. As of 2Q25, ODCE cap rates sat about 30 basis points below interest rates, which compares to a historical average of roughly 30 bps positive spread over interest rates. However, embedded NOI growth—especially from industrial and multifamily assets, which comprise two-thirds of the index—provides a 75- to 100-basis embedded spread for stabilized cap rates. This growth helps maintain equilibrium between income yields and borrowing costs, even in a higher-rate environment. 

4. Price-to-Value Alignment Holds, but Sector Variance Persists 

Transaction data within ODCE showed sales prices within 2% of prior-quarter appraised values in aggregate, signaling close alignment. By sector, apartments and office traded modestly below appraised values (–2.2% and –4.9%, respectively), while industrial and retail transacted slightly above (+1.3% and +1.5%, respectively). Still, panelists cautioned against overgeneralization, given low transaction volumes and asset-quality differences. Compared to 2Q 2022 peaks, aggregate CRE pricing is down 34%, though most recently much of the decline is skewed heavily by office sales.  Values have not declined nearly as much (down 18%), but much of that is skewed by allocation, where office represents an outsized portion of the sales volume as compared to their allocation within the ODCE index, which is believed to be a function of both increased liquidity capitulation of price/value by owners within the office sector.    

5. Apartments Face Disconnect Between Buyers and Appraisers 

Apartment fundamentals remain solid, with proforma cap rates steady at about 4.7% and transactions generally trading at or below 5% on in-place income. Leasing strategies are emphasizing occupancy, even at the expense of concessions. A key tension lies in underwriting: buyers are increasingly modeling stronger future rent growth on expectations of supply constraints, while appraisals still assume moderate growth of about 3%. Higher unlevered and levered returns (discount rates) is the key point of reconciling differences in the buyer underwriting of growth expectations vs. appraisals. 

6. Industrial Stability Balances Trade Uncertainty 

Industrial appraisal cap rates remained flat in the second quarter, with proforma rates nearing 4.0%. Despite softening rents in Southern California, broadly below-market leases continue to support valuation stability, given there is still a sizeable mark-to-market opportunity within the industrial sector. Transaction momentum remains cautious, influenced by global trade uncertainty, though long-term outlook for strong NOI growth remains favorable. 

7. Office Transaction Activity Picks Up, but Fundamentals Lag 

Office transaction volume rebounded in 2Q, reaching nearly $2 billion compared with $500 million in the first quarter. Yet persistent vacancies and heavy CapEx requirements continue to weigh on valuations. Appraisal cap rates (based on in-place NOI) remain below 6%, while top-tier markets such as New York and San Francisco are seeing renewed leasing activity, the latter tied to AI-related demand. Life sciences, by contrast, face mounting headwinds, with some owners reverting properties back to traditional office formats. 

8. Retail Delivers Consistent Growth, Driven by Grocery-Anchored Assets 

Retail continues to outperform, with appraisal cap rates holding steady in the mid-5% range. Transaction cap rates fell sharply from the mid-6% to low-5% range, reflecting strong demand for grocery-anchored centers. However, the panelists emphasized the sector’s segmentation, cautioning that broad averages can obscure divergent performance among sub-sectors. 

Looking Ahead: Income-Led Returns in a Stabilizing Market 

SitusAMC expects ODCE unlevered property-level total returns of 6.5% to 7% annually over the next three years, driven primarily by a near 5% income return and modest capital appreciation of 1.5% to 2%. With cap-rate compression unlikely in the near term, income growth is expected to be the primary driver of performance. Industrial, multifamily and retail fundamentals support long-term stability, while office continues to be the key drag on aggregate metrics, most particularly NOI growth. For investors, disciplined underwriting and sector-level granularity will be critical as the market navigates easing rates, geopolitical risk and shifting tenant demand.  

Watch a recording of the webinar here or download the slides here. For more information on SitusAMC’s Real Estate Valuation Services, visit our website.