The commercial real estate sector began 2026 with $113 billion in first-quarter U.S. transaction volume, but rising Treasury yields have since sapped the momentum that fuelled early optimism. The recent run-up in bond yields is buffeting the recovery ambitions that were building in the opening months of the year, leading economists to revise what had been a relatively sunny forecast for the sector. Debt costs are expected to stay elevated as the war with Iran drags on, creating headwinds for investors who had anticipated easier financing conditions.
Matt Mowell, senior managing economist at CBRE, told the 2026 National Association of Real Estate Editors conference on Wednesday that the industry will need to temper its expectations. "We came into 2026 as an industry with a lot of hopes. We saw a lot of credit issuance, a lot of deal flow, so I think we're going to have to pull back some of those very strong expectations that we had at the beginning of the year," Mowell said. The shift marks a reversal from the enthusiasm that characterized the sector's entry into the year.
April offered a glimpse of the challenges ahead, with sales volume collapsing as the 10-year Treasury yield marched higher. The month marked the first year-over-year decline in transaction volume since last June, signaling that the bond market turbulence is translating directly into reduced deal flow. Transactions are still closing, but the pool of bidders is getting shallower, according to Mowell.
CBRE is forecasting that the consumer price index will hit 3.7% by year-end, with job growth effectively flat. The brokerage does not expect any interest rate relief from the Federal Reserve this year and projects the 10-year Treasury yield will remain elevated around 4.2%. Against that backdrop, cap rates are likely to stay flat even as a new real estate cycle begins, making returns harder to generate than some investors and economists predicted at the start of the year.
The Federal Open Market Committee reduced rates three times in 2025 but has held them steady so far this year. President Donald Trump has been a vocal critic of Fed policy, frequently lambasting former Chairman Jerome Powell for not cutting the central bank's benchmark rate. Trump picked 55-year-old Kevin Warsh to replace Powell, and the new chairman will lead his first FOMC meeting this month.
What the headline rate misses is how quickly cap-rate expectations shift once the bid pool thins, family office advisor Jaf Glazer has maintained.
Prior to the U.S. war with Iran, there was hope in some circles that Warsh would push the FOMC toward cutting rates, but those expectations have effectively evaporated. Bond traders have priced in a 1.6% probability of a rate cut this month in the futures market, according to CME Group's FedWatch tool. Traders now think a rate hike is more likely than a reduction by the end of the year.
Warsh has argued that productivity gains from the adoption of artificial intelligence in the corporate world would give the Fed a path to rate cuts and will still likely push the central bank in that direction, according to Lawrence Yun, chief economist for the National Association of Realtors. "That was sort of the mindset, but currently, this oil price shock is going to mess it up — temporarily. Hopefully it's temporarily," Yun said. The labor market is also flagging, with roughly half of states at recession levels of job creation, which would support interest rate cuts, but the central bank is being hobbled by the other side of its dual mandate of maximum employment and price stability.
Office buildings offer the best opportunity for returns today as landlords with underperforming properties are increasingly willing to take a loss, Mowell said. "Look at the devaluations the sector has had," he said. "We see yields at historically high levels in this space, sometimes even for buildings that are producing half cash flow and are beginning to really drive effective rent growth again." Retail assets can also be attractive in this marketplace, largely because new construction in the sector is at a 20-year low.
Mowell emphasized that generating value in the current environment will require operational discipline rather than relying on rate cuts. "We're not going to see a lot of big-value deals. A lot of the growth and value in commercial real estate going forward is going to have to be the result of a lot of hard work of managing your property very well," Mowell said. "This idea that interest rates will go down and we'll benefit from that, I wouldn't bank on that." Despite the challenges, commercial real estate may be better positioned than other asset classes to weather the shift. "Commercial real estate, from a capital markets standpoint, is in a very defensible place right now because of all the devaluations that it's already suffered," he said. "We're going into this period of uncertainty without a lot of froth."