CRE in an easing cycle: Why long rates matter more than the Fed

September 24, 2025 | 2 min read

Rich Hill

Global Head of Real Estate Research & Strategy

With the Fed embarking on a new rate cutting cycle, some investors are left wondering what impact it might have on commercial real estate markets. Historically, the Fed funds rate and 10-year Treasury yields have shown some directional correlation, leading many investors to assume that just as rates rose during the last hiking cycle, they should fall in the next easing cycle. But this assumption is not guaranteed.

Two caveats complicate the picture, and have important implications for CRE valuations, financing conditions and investor portfolios.

Correlation is weaker in changes than in levels. While the levels of Fed funds and the 10-year Treasury are positively correlated, the correlation between their day-to-day or cycle-to-cycle moves is much lower.
Long rates are normalizing, not just following the Fed. After a four-decade secular decline, 10-year yields are now closer to their historical norm—averaging 4.35% from 2000–2007 and 4.51% between 1990-2019, compared with roughly 4.10% today. What was truly unusual was the post-GFC decline to record lows, driven by unprecedented central bank intervention.

What matters most is stability in 10-year Treasury yields

A range of 4.0% to 4.25%—with inflation running near 3%—would create a highly accommodative backdrop for CRE. Real rates are ultimately more relevant than nominal rates given the strong historical correlation between NOI growth and inflation—and that environment implies a real rate of roughly 1% (4% nominal – 3% inflation). For context, real rates have averaged 1.5% from 1997 to today, 1.7% from 1997 to 2019, and 2.9% from 1997 to 2007—periods during which CRE delivered attractive returns.

What does this mean for the next cycle?

In our 2025 mid-year update, Back to Basics, we argued that fundamentals will be a primary driver of total returns versus the post-GFC financially engineered returns that were driven by historically low interest rates. We do not expect significant cap rate compression; instead, total returns will likely come mainly from income and capital growth via NOI. This makes property and market selection critical. For example, data centers stand out for generating some of the highest NOI growth among CRE property types. Our projections for unlevered, asset-level total returns in 2025 are 5–6%, rising toward the low 7% range annualized over the next five years and approaching the historical 10% annualized over the next decade, with certain property types—particularly alternatives like data centers—expected to outperform.

Bottom line

For CRE, it’s longer-term interest rates that matter, not the Fed funds rate. After all, the sector typically relies on long-duration financing rather than short-term floating debt. We see little scope for a meaningful decline in 10-year Treasury yields—even if the Fed were to pursue an aggressive easing cycle, which itself is uncertain given sticky inflation. Moreover, if yields were to fall below 4%, that may not be the relief rally some expect. Instead, falling yields could point to a weaker economic backdrop marked by slower growth and wider credit spreads. The real signal to watch is not how fast the Fed cuts, but whether long-term rates decline for the right reasons.

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Disclosure

Investing involves risk, including possible loss of Principal. Past Performance does not guarantee future return. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. Commercial real estate (CRE) investments carry several inherent risks, including those related to the economy, interest rates, and tenant behavior. These risks can impact property values, rental income, and overall investment returns.

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