Recession Fears Have Markets Reeling, But CRE Investor Optimism Is Growing

JPMorgan Chase estimates there’s a 31% chance of a market downturn in the near future, almost double its forecasted recession risk in November. That might not be an entirely bad thing for commercial real estate.

The yield of the U.S. 10-year Treasury bond, used to price all sorts of debt, began an upward climb that coincided with the Federal Reserve's first interest rate cut in September. 

But it’s been falling ever since President Donald Trump took office — not because inflation and federal spending are being reined in, but because his governing style has injected new uncertainty into the market and his tariffs threaten to upend economic growth. Investors’ moods have soured, and the major stock indexes have been sliding since the middle of February. 

A continuation of current trends could derail the economy. The Federal Reserve Bank of Atlanta now predicts the economy will shrink by 1.5% in the first quarter, a steep revision from 2.3% growth. But falling long-term Treasury bond rates and a stock selloff would also make real estate investments a more attractive asset class and ease the financing challenges faced by thousands of property owners in today’s elevated interest rate environment. 

“Real estate has always been seen as an inflation hedge, because rents and property values tend to rise over time,” Moody’s economist Twinkle Roy said. “Now, with Treasury yields and interest rates falling, investors are going to look for higher returns, and that might shift the capital from bonds to real estate.” 

The change in market trends is a response to the Trump administration’s aggressive efforts to reshape economic and trade policy. Trump’s tariff proposals have roiled markets, effectively wiping out gains from the rally that followed his election win. 

The rapid decline of the 10-year Treasury bond rate in recent weeks reflects growing pessimism from investors about the broad direction of the U.S. economy. Investors are not just worried that tariffs could reignite inflation, they also are concerned about the country’s long-term fiscal health as Republicans advance a budget through Congress that would cut taxes and raise the federal deficit.  

While the factors pushing long-term bond yields lower have negative implications, it is nonetheless a positive development for property owners, Roy said.

“A falling 10-year isn’t going to be a boost to property values, but it's going to be helpful for the volume of transactions, to keep them recovering,” she said.

It’s also become a key focal point for the Trump administration. Treasury Secretary Scott Bessent told Bloomberg last month that the White House wasn’t waiting for the Federal Reserve to shift monetary policy and was more interested in long-term interest rates where Fed policy is less impactful.

“The 10-year, I believe, is the important price to focus on. It's mortgages, it's long-term capital formation,” he said.

The Dow Jones Industrial Index has fallen more than 500 points in recent days after tariffs on Mexico and Canada, which had been delayed by a month, went into force. 

By Thursday, the administration had effectively reversed course and once again suspended the levies, this time until April 2. That move followed a similar announcement Wednesday, two days after the 25% tariffs on all imports took effect, that carved out a monthlong exemption for the auto industry. 

The whipsawing nature of the economic policy rollout is itself sucking confidence out of the investment market. Despite walking back the tariff plan, the three major U.S. stock indexes all closed down by at least one percentage point Thursday, with the tech-heavy Nasdaq shedding 2.61%. 

At the same time, consumers are feeling less optimistic about their future and are spending less for the first time in nearly two years. Inflation remains well above the Federal Reserve’s 2% target rate and is rising. 

The recent market retreat follows a long bull run for stocks, propelled by tech firms and huge investments into research, infrastructure and enterprises creating and supporting artificial intelligence solutions. 

While stocks like Nvidia and Alphabet soared in 2024, skepticism about the commercial real estate market kept that sector from seeing the same outsized gains. As economic growth expectations shift, the market repricing that follows will boost real estate stocks, J.P. Morgan analyst Anthony Paolone said. 

Expected returns through 2025 for the S&P 500 are pegged at around 12%, while real estate stocks are looking at closer to 4% growth. 

“There's a really big growth gap there. Now, if something were to really interrupt the economic picture, there's a greater likelihood that that 12% would come down a lot more than the 4% would go down,” he said. 

High tariffs and a strong dollar will lead to drops in the value of both stocks and bonds, according to a recent analysis by MSCI. But the losses would be uneven, with U.S. equities falling nearly 17% while U.S. investment-grade bonds shed 6% of value. 

“This incremental uncertainty has been a bit more helpful to REIT stocks, because suddenly what's an under-owned sector has landed on people's radar screens because of its defensive attributes,” Paolone said.

That same uncertainty is part of what’s pushing down the 10-year Treasury yield far enough to start impacting capital markets. Lower debt costs will give buyers and sellers more room to negotiate on price, and the backlog of property owners that have delayed refinancing in the face of high interest rates will have more space to transact. 

There will still be property owners who are squeezed out of business by the postpandemic economy, but the retreat of the 10-year Treasury bond rate will empower the market to pick the winners and losers after nearly two years of stagnation, Roy said.

“Financing is going to become tighter because lending standards are going to tighten up as banks and financial institutions become more risk averse,” she said. “That will impact borrowers with weaker credit profiles, who may struggle to secure financing. But it could benefit well-capitalized investors with strong balance sheets that can buy distressed assets.”