As interest rates are expected to stabilize in 2025, with 10-year Treasury yields projected to settle between 3.75% and 4.25%, CRE investors must align their strategies to navigate the evolving rate environment. Here are key considerations and strategies:

Debt Capital Markets Strategies

Fixed vs. Floating Rates:

• The anticipated moderation in interest rates and a return to predictability present an opportunity to secure fixed-rate financing for both short and longer-term obligations. Allowing investors to more accurately forecast cash flows and provide protection against unforeseen future rate increases is the hallmark of a healthy real estate environment.  Spreads remain relatively elevated on anything but core deals as lenders maintain cautious underwriting standards. All-in borrowing costs will likely remain above early 2023 levels, continuing to pressure leveraged returns.  Banks, life insurance companies, Fannie-Mae & Freddie Mac and CMBS remain active, liquid and continue to seek out good opportunities with quality borrowers.
• Matching your debt liabilities with your asset strategy is critical.   Floating-rates have dropped by ~100 bps since the summer of ’24 and may be more attractive for investors seeking flexibility in short to medium-term projects.

Capital Stack Creativity:

• Mezzanine debt and preferred equity fill gaps in capital stacks while maintaining favorable terms.
• Debt funds and alternative lenders offer creative and flexible financing solutions, especially for construction and transitional assets.  These lenders are active and a good alternative for floating-rate opportunities.

Multifamily and Industrial:

• Strong fundamentals in these sectors make them ideal and sought after opportunities for investors and lenders alike. Demand-driven growth and an easing in costs will likely attract regional and institutional capital.  Maintaining positive – neutral leverage will continue to occupy investors.

Retail:

• Retail is experiencing a resurgence. Experiential and neighborhood centers, grocery-anchored product, high street retail and local strip centers are all benefitting.  Similar to multifamily and industrial, investors and lenders are actively seeking well located opportunities.

Hospitality:

• Rebounding travel demand has created demand for select service and resort-oriented assets. Flexible debt structures remain active in this space.

Conclusion

The 2025 rate environment provides opportunities for strategic CRE investors to recalibrate their approach. By focusing on prudent financing, sector-specific opportunities, and risk management, investors can position themselves for success in an evolving market.  It is more critical than ever to align with a capital markets advisor who is experienced, has deep relationships across the entire debt spectrum, has seen multiple cycles and the ability to collaborate with lenders, equity partners and operators to navigate through exciting, yet still uncertain times.