Bond Market Turbulence Saps CRE Momentum

The bond market hasn’t derailed the commercial real estate sector’s 2026 recovery ambitions — which started with enthusiasm and $113B in first-quarter U.S. transaction volume — but it has made it much harder. 

The recent run-up in yields on Treasury bonds is buffeting the momentum that was building in the first quarter and sapping optimism from the marketplace. Debt costs are expected to stay elevated as the war with Iran drags on, and it is leading to some revisions to what had been a relatively sunny forecast for the sector. 

“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,” Matt Mowell, senior managing economist at CBRE, said Wednesday at the 2026 National Association of Real Estate Editors conference.

April may have offered a glimpse into the future, with sales volume collapsing as the 10-year Treasury yield marched higher, marking the first year-over-year decline since last June.

Inflation is likely to remain elevated this year, with CBRE forecasting the consumer price index hits 3.7% by year-end, while job growth will be effectively flat. The brokerage isn’t expecting any interest rate relief from the Federal Reserve this year and expects the 10-year yield to remain elevated around 4.2%.

A new real estate cycle has begun, but the macroeconomic pressures are likely to keep cap rates flat. Generating returns against that backdrop will be more challenging than some investors and economists predicted at the start of the year. Transactions are still closing, but the pool of bidders is getting shallower, Mowell said. 

“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.”

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. 

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, but not until it overcomes the inflationary pressure of the U.S. fight with Iran, said 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,” he said. 

The labor market is also flagging — roughly half of states are at recession levels of job creation, Yun said — 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. 

The K-shaped economy, in which high net worth households continue spending as Americans with less disposable income pinch pennies, is defining market activity in the single-family rental space, said Selma Hepp, chief economist at Cotality.

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. While the broader sector needs to reset its expectations for the year to reflect the reality of the debt market, the asset class is in some ways better positioned than others to weather the shift, Mowell said. 

“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.”