The Federal Reserve has begun cutting rates. Borrowing costs should be falling. Commercial real estate should be breathing a sigh of relief. Yet the sector remains locked in a frustrating stalemate, and for high-net-worth investors trying to time the market, understanding the reason requires looking beyond the headlines.
When Rate Cuts Don’t Cut It
The Fed reduced its benchmark rate to 3.75% to 4.00% in October 2025, marking the second cut of the year. On paper, this should signal relief for a capital-intensive industry that’s been suffocating under elevated financing costs since 2022. But the reality has been more complicated.
Following the Fed’s announcement that further rate cuts may not occur this year, the 10-year Treasury yield actually ticked upward and continues hovering around 4.1%. This disconnect, falling short-term rates but sticky long-term yields, lies at the heart of commercial real estate’s current predicament.
The issue is that commercial mortgages aren’t priced off the Fed funds rate. They’re priced off longer-term Treasuries, and those yields reflect market expectations about inflation, economic growth and the government’s borrowing needs. Currently, bond markets are indicating that they’re not convinced inflation is fully under control, and they’re demanding compensation for this uncertainty.
Commercial mortgages are running 200 to 300 basis points above Treasuries, meaning financing costs that once seemed extraordinary have become the new baseline. For investors accustomed to sub-3% returns during the pandemic era, this represents a fundamental reset in how deals pencil out.
The Math That Changed Everything
Consider a straightforward example: A quality retail building in a strong market might have traded at a 5% cap rate in 2021 with 65% leverage at 3% interest. The equity return was attractive, refinancing was easy, and appreciation seemed inevitable.
Fast-forward to today. That same building might now require a 6.5% cap rate to find a buyer, with debt available at 7%. Suddenly, leverage destroys returns rather than enhancing them. The entire financial architecture that supported valuations for over a decade has crumbled.
This explains why transaction volume remains depressed despite modest rate relief. Sellers remember 2021 valuations and resist accepting markdowns. Buyers underwrite to today’s cost of capital and can’t justify yesterday’s prices. The gap between bid and ask has narrowed as reality sets in, but it hasn’t closed entirely.
The Trillion-Dollar Refinancing Wave
The real stress point isn’t new acquisitions, it’s existing debt coming due. Nearly $1 trillion in commercial real estate loans will mature over the next few quarters, forcing property owners to refinance at much higher rates.
Many of these loans originated in the ultra-low-rate environment of 2020-2021. Borrowers who locked in 3% fixed-rate financing are now facing renewal at 7% or higher. For levered properties, this can easily turn positive cash flow into losses overnight.
The math is unforgiving. A $50 million loan at 3% costs $1.5 million annually in interest. At 7%, that jumps to $3.5 million—an additional $2 million in annual expenses that must come from somewhere. If the property can’t support higher debt service through rent increases or expense reductions, owners face difficult choices: inject more equity, sell at a loss, or default.
This dynamic is already playing out in office markets where pandemic-era work-from-home shifts have permanently reduced demand. But it’s not limited to offices. Any property that can’t grow income fast enough to offset higher financing costs is vulnerable.
Where Opportunity Meets Capital
For well-capitalized investors, this refinancing crisis represents the most compelling near-term opportunity in commercial real estate. The refinancing wave will expose overleveraged deals and distressed assets, creating openings for those with dry powder to step in with rescue financing or acquire properties at discounted valuations.
The playbook is straightforward but requires patience. Identify quality assets held by overleveraged owners who can’t refinance on acceptable terms. Offer rescue capital, whether through mezzanine debt, preferred equity, or outright acquisition, at valuations that reflect today’s cost of capital.
Private credit funds and non-bank lenders have rushed to fill this gap, deploying capital at premium rates, often 10% or higher for junior positions. For high-net-worth investors willing to do direct deals, the opportunity to earn attractive risk-adjusted returns while maintaining meaningful collateral protection is significant.
Recalibrating Return Expectations
Perhaps the most significant shift for high-net-worth investors is psychological: accepting that the returns of the zero-rate era are unlikely to return anytime soon.
A levered equity return of 12%-15% seemed routine when you could borrow at 3% against a 5% cap rate asset. Today, a 6.5% cap rate financed at 7% might generate an 8% equity return—if everything goes right. That’s not a bad return in absolute terms, but it requires a mental reset after years of easy money.
The silver lining is that these returns reflect genuine economic value creation rather than financial engineering. Properties must perform operationally. Rents must grow. Expenses must be controlled. This shift toward fundamentals-driven investing is healthier in the long term, even if it’s less lucrative in the short term.
For context, an 8% equity return on a well-located, income-producing property with moderate leverage may actually represent superior risk-adjusted performance compared to the leverage-fueled double-digit returns of the previous cycle, especially when factoring in the reduced refinancing risk that comes with conservative capital structures.
Positioning for What’s Next
The interest rate environment of late 2025 demands a different playbook than investors have used for the past 15 years. The gap between short-term Fed policy and long-term market rates creates both challenges and opportunities for those who understand the dynamics at play.
Success will require patience with deployment. The refinancing wave will produce dislocations over quarters, not weeks. Waiting for motivated sellers often means better terms than forcing deals today. Conservative assumptions are essential—underwrite to today’s rates, not projected future cuts.
Properties must generate cash flow from day one. Capital appreciation driven by cap rate compression is less reliable now. The focus should be on income-producing assets with solid fundamentals rather than speculative plays dependent on rate movements.
The Bottom Line
The Fed’s rate cuts have begun, but commercial real estate remains stuck in transition. Long-term yields haven’t followed short-term cuts, keeping financing costs elevated. The massive refinancing wave ahead will separate well-capitalized, patient investors from those who overextended in the easy-money era.
For high-net-worth investors, this isn’t a moment to retreat from commercial real estate; it’s a moment to be selective and ready to act when genuine distress creates genuine opportunity. The deals won’t look like 2021, and the returns won’t mirror that era either. But for those who adjust their expectations to match today’s reality, the next few quarters could offer some of the best risk-adjusted entry points in years.