As of mid-2025, the stock market has roared back, and 7 million more Americans are receiving paychecks compared to the peak pre- COVID employment situation. Wages are rising faster than consumer prices and thereby boosting real inflation-adjusted income. Despite the improving economy, however, commercial real estate is not yet fine.
High interest rates are the main culprit. The need to refinance nearly $1 billion per year of commercial real estate debt over the next few years, though not leading to massive foreclosures, is putting stress on the market. High interest rates also mean high cap rates and lower property prices even with positive, though slow, rent growth. Some are looking to deal at discounted prices, and overall investment activity is modestly gaining but remains far short of the norm.
Lower interest rates will greatly help. The current Fed funds rate of 4.3% is way above the 2.5% average rate over the past 30 years. The Federal Reserve has been on pause and indicated a wait-and-see approach due to tariff impact uncertainty. In the meantime, consumer price inflation was at 2.7% as of June, down from 9% three years ago. The tariff impact is evidently being counterbalanced by lower energy prices, less regulation, and reciprocal tariff reductions through negotiations. The Fed will cut rates multiple times over the next 12 months. The sooner, the better.
