You've Weaned Yourself Off Interest Rate Cuts. Now It's Time To Sweat

For more than a decade, real estate rode the high of super-low interest rates. Then came the comedown of rates rising in the UK and U.S. at record speeds. 

Now, with long-term interest rates expected to stay pretty much flat for the foreseeable future, real estate investors are going to need to sweat it out. 

For the next part of the cycle, making money in commercial real estate will come down to improving income in your buildings — attracting and picking the right tenants, improving operations and increasing income. 

“I think income is going to play a bigger part in terms of the percentage of the overall return,” Income Analytics Chief Executive Matt Richardson said. “So, I suspect you're looking at lower returns, and a bigger percentage of that will be coming from the cash flow.”

This isn’t a new phenomena: The value of commercial real estate has always been founded on the price someone is willing to pay to rent it. 

But asset management and a focus on income fell out of fashion in the past 15 years, first as real estate became more closely aligned with the globalized world of financial markets and then because falling interest rates allowed investors to make money whether or not they increased the rent on a property. 

Distress has been rising in sectors like U.S. multifamily real estate because investors piled in during 2021 and early 2022, betting that values would continue to rise. Now that values have fallen, owners don't have the capital needed to drive income from improving the quality and operations of properties. 

The revaluation of assets has been rapid and painful. More than 60% of office sales in the first half of 2025 in markets like Houston and San Francisco were at discounts to the previous sales price, often of 50% or more. 

Richardson, whose company analyzes the quality of income from commercial real estate tenants and their likelihood of default, has written a paper on how real estate investors have come to look at the sector through the wrong lens.

Using the insights of behavioral economics, Richardson said investors anchor their view of what makes a good real estate deal on the capital value at which a property is bought and sold.

If you sell for more than you bought for, you look like a hero, right?

But this ignores the math, he said. Data from MSCI looking at average annual real estate returns in the UK showed that about 70% of returns come from income, while less than a third come from capital appreciation.  

What’s more, the returns from capital growth are nine times more volatile than income returns — if you get it wrong and buy at the wrong time, it can be impossible to make money.

But income return is steadier, and more importantly, it’s something investors can influence. 

The same patterns emerge in U.S. data, he said. And the next few years won’t be a time when investors get much help from capital value appreciation in the majority of sectors.  

“You've got no control over the market because the market is the market, it's just going to do what it's going to do,” he said. “You may as well get a monkey throwing darts at a board. But the income part of the equation you can control.”

The importance of income — predictability, resilience, the ability to grow — has manifested in a move away from sectors such as office and retail toward areas such as multifamily, student accommodation, healthcare and digital sectors including data centers and cell towers. Income in those sectors is seen as more resilient because they are supported by demographic tailwinds such as housing shortages and digitization.

That shift has been underway in the U.S. for decades, and the UK and Europe are catching up.

For big real estate firms that invest in multiple sectors, income-based investing necessitates a change in the staffing and structure of the company. 

“We still have all-arounders, but it's meant that we’ve definitely lent more towards people with expertise in certain areas,” Hines Managing Director for Asset Management Raj Rajput said.

The operational expenditure and capital expenditure of specialist sectors require dedicated experts to manage budgets and increase income as much as possible.

“For us, it's about driving alpha, so it's adding value at an asset level,” Rajput said. “So having that specialism allows us to do that.”

More specifically to the current market, he said his asset management team is getting much more involved at the due diligence stage of acquisitions, helping deal teams to make sure the underwriting is as accurate as possible. 

In a market where capital value growth can’t be guaranteed, even small deviations on expenditure and income levels can have a big impact on returns, he said. Intense attention is being paid to factors such as building fabric, mechanical and engineering systems, and power resilience. 

“We don't want to get caught out at acquisition, and there's something which is going to come back and bite you in six months’, nine months’ time,” Rajput said. 

Rents are rising in major office markets around the world, including London, because of the dearth of new development over the past decade. 

But that growth is patchy, Rajput said, with buildings on the same street sometimes seeing very different outcomes on occupancy and rents. So there are structural changes in asset management and operations that are subtly shifting the way the office sector does business. 

First, there is the increasing operational intensity of offices: the lobby full of staff there to help workers or visitors on arrival, and building management teams and apps. 

Then, there are the amenities provided by office owners: the cafes, gyms and event spaces that tenants increasingly want. 

But whereas these were, for a long time, seen as a loss leader by landlords, owners are now increasingly seeing them as an income stream — if they can be done well. 

“It will take them two or three years in bigger buildings to stabilize, but then they should kick out a profit,” said Claire Dawe, head of asset management at London development manager Stanhope. 

Finding best-in-class companies to manage the operation of facilities is vital, she said, adding that event spaces have been particularly effective in increasing revenue.

Of course, the building must be big enough to include such spaces, or the investor must own a campus or multiple assets in close proximity, but tenants are willing to pay for meetings and event spaces and other amenities to avoid having to provide them themselves. 

Both Dawe and Rajput said tenants are approaching them much earlier to discuss whether to regear leases than would previously have been the case — at least two or three years ahead of a lease expiry, even for small tenants, and longer again for those with a bigger footprint. Getting these discussions right plays a huge part in maintaining and increasing income in this market. 

“It's tidying up those income streams much earlier, increasing your [weighted average lease term], which will increase your investment value,” Dawe said. 

She added that the incentives being offered to tenants to stay in place are now broadly in line with those that would be offered to a new tenant, whereas, historically, new tenants got better deals. 

And Rajput said his team is working on creative solutions to take on some of the cost burden of a new tenant so a new occupier doesn’t have double overhead if leases overlap.

“There's a lot more thinking around that aspect than just assuming it's two years rent-free, this is the rent and off you go,” he said. 

There is also a growing trend of major landlords offering fully fitted office space to help tenants absorb the rising cost of construction and move in more quickly.

“As a landlord, it comes at significant cost, and you have to factor in how you finance those sort of deals,” Rajput said. “But, ultimately, if it's the difference between your building being let or not to a decent covenant on a long lease, often you will think about it, or doing some sort of halfway house.”

That is the kind of flexibility and creativity that will drive returns for the next few years, Income Analytics’ Richardson said. 

“I think it's going to be an interesting market, and I think the people who are going to do well are the people who sweat the assets.”