Commercial Real Estate: 10 Things to Consider in the New Rate Cycle

The Federal Reserve's federal funds rate cut of 0.25% in September, the first move since December 2024, was followed by another 25 basis point cut in October and a third in December, bringing the benchmark rate to 3.50%–3.75%. This continued easing reflects the Fed's growing concern that risks around labor market weakness have eclipsed the risk of inflation. While the long-term trajectory of rates remains uncertain, modest relief could provide a tailwind for commercial real estate (CRE), boosting investor sentiment, transaction volume, and asset valuations. Below are ten key insights to help investors and stakeholders identify emerging opportunities and potential risks during this rate cycle.

1. Further Rate Cuts Could Realign Cap Rates and Revive Transactions

High interest rates have suppressed CRE transaction volume by widening the bid-ask spread and complicating refinancing. Debt markets tightened and leverage declined. The recent rate cut may begin to reverse these trends by lowering borrowing costs and improving access to capital, particularly for well-positioned sponsors. Lower rates could also compress cap rates, supporting valuations and narrowing big-ask spreads, though further rate cuts may be needed to materially boost activity.

2. Lower Rates May Ease Underwriting Constraints

Reduced borrowing costs may ease recent underwriting limitations, improving liquidity. Opportunistic and value-add investors may find new entry points as lenders become more flexible and capital flows resume.

3. Vacancy Is a Less Reliable Valuation Metric in Today’s Market

Pre-pandemic valuation models heavily weighted vacancy rates as a proxy for asset health. But Brookings highlights a “three-way mismatch” between available space, locations with demand, and entrepreneurs with capital and community support, meaning vacancy alone no longer reflects true market opportunity.

For example, office demand has contracted by 160 million square feet since Q1 2019, while retail, once considered overbuilt, now boasts the lowest vacancy rate among CRE sectors.

This divergence highlights the need for sector-specific analysis. Office continues to face structural headwinds, while retail has rebounded due to localized consumer behavior and constrained new supply.

4. Investors Are Pivoting to Value-Add and Adaptive Reuse

The traditional goal of"filling space" is being replaced by active value creation strategies. Investors are repositioning assets through rebranding, amenity upgrades, and lease restructuring. Rezoning and adaptive reuse, especially for mixed-use or higher-density development, are gaining traction.

5. Distressed Assets Present Strategic Opportunities

With refinancing challenges and valuation resets, distressed assets are increasingly attractive to opportunistic investors. These properties offer potential for repositioning, especially in transitional submarkets where demographic and policy trends support long-term demand.

6. Sector Performance Has Diverged Sharply

Multifamily remains resilient, with CBRE forecasting vacancy rates to fall to 4.9% by the end of 2025 as rents accelerate and construction slows.¹ Meanwhile, Industrial, while still strong, faces headwinds from a temporary oversupply overhang, which may weigh on rent growth and absorption in the near term.

7. In Life Sciences, The Cyclical Fundamentals are Shifting

Once considered insulated from broader CRE distress, life sciences now show mixed signals. Vacancy rates in the sector have surged to 23.9% as of September 2025, with softening rents and rising concessions. Yet 63% of new construction is pre-leased, indicating strong build-to-suit demand in select markets.²

Resilience in this sector is increasingly tied to specialized infrastructure and talent access, not traditional occupancy metrics.

8. Regional Growth Is Driving Investment Strategy

Markets like Austin, Raleigh, and Nashville are seeing strong demand driven by tech, healthcare, and population growth. Meanwhile, gateway cities like Boston and New York are regaining momentum, supported by institutional capital and infrastructure investment.

Dallas–Fort Worth and Miami continue to attract investor interest, particularly in multifamily and mixed-use developments.

9. Data Centers Have Emerged as a Strategic Asset Class

As digital infrastructure becomes essential, data centers have gained traction among CRE investors. Their performance is tied to long-term trends in cloud computing, AI, and consumer behavior, making them a compelling complement to traditional asset classes.

10. Several Key CRE Risks Remain: Inflation, Liquidity, and Policy Shifts

Despite recent rate relief, risks persist. Inflation could reaccelerate, and the Fed’s future rate path remains uncertain. Valuation volatility may continue, especially in sectors like office. Liquidity risk is a concern for assets in secondary markets or those with near-term refinancing needs.

Investors should assess debt maturity profiles, stress-test scenarios, and monitor policy and regulatory shifts that could impact asset performance and repositioning strategies.

Looking ahead

While challenges persist, the CRE market is showing signs of stabilization. Additional rate cuts could catalyze renewed activity, especially in resilient sectors and emerging regions. For Citizens Private Bank clients, disciplined optimism and local market insight will be key to succeeding in the next phase of CRE investing.

To learn more about Citizens Private Bank’s focus on Commercial Real Estate, visit our Commercial Real Estate Page and speak to a dedicated Relationship Manager.