In June 2024, I authored an article titled “Reset Ready: Navigating the Great Reset in commercial real estate.” At the time, I argued that years of persistently low interest rates and corresponding cap rates had resulted in many commercial real estate properties being over-levered. Additionally, increasing operating costs—such as insurance, real estate taxes, personnel expenses, and maintenance—were outpacing rent growth in many cases, further diminishing property values. This new math of CRE valuations and leverage, combined with the end of “extend and pretend” loan modifications and a wave of loan maturities, signaled an inevitable market correction – termed the Great Reset.
Since then, there has been more interest rate volatility than the markets were predicting. In late summer 2024, long-term rates decreased, causing a bump in transaction activity as owners locked in rates or sold properties while the 10-year Treasury fell from the mid 4% range to the high 3% range. Because CRE transactions normally take 45 to 90 days to close, these deals materialized in the last quarter of 2024. The increase in transaction activity and refinancings was an early indication of the Great Reset’s beginning.
Then a strange thing happened in the bond markets. The Federal Reserve decreased short-term rates, yet long-term rates climbed sharply. Market expectations of a new administration in Washington that would be generally more business friendly, the possibility of future inflationary pressures from tariffs, and a stricter immigration policy contributed to this volatility.
Following the election, there was optimism in the markets as investors anticipated the tailwinds to the economy of lower regulations and lower or at least stable income taxes. The stock market rallied, credit spreads on all asset types (including all forms of commercial real estate loans) decreased by 25-50 bp as liquidity returned to the market. Banks, life companies, debt funds and other forms of private credit and CMBS lenders all increased allocations for 2025. Since it takes 45-90 days from inception to close a loan, these new spreads and underwriting factors appeared in early 2025 closings. For example, according to Trepp, CMBS issuance is now outpacing last year’s levels, with debt yields on approximately $6 billion in office-backed loans averaging 10% (compared to 13.4% on the approximately $8 billion issued in all of 2024). Although these bullish statistics may be skewed by large trophy-office financings, the trend reinforced momentum in CRE transactions and sustained the Great Reset.
Yet, the initial optimism surrounding the new administration has tempered and even reversed. The repeated announcement, postponement, and modification of tariffs on key trading partners and allies have caused uncertainty and trepidation for consumers and businesses alike. Companies thrive on predictability, and the constant change in announced policies has influenced business’s ability to plan, causing a delay in investment decision making. At the same time, consumers have come to realize that tariffs are consumer taxes that will raise prices.
The latest University of Michigan Consumer Sentiment Index took a nosedive by 11% in mid-March from the previous month to 57.9, reflecting growing concerns. Meanwhile, the new administration has followed through on their immigration crack-down, causing businesses that rely on immigrant labor to be concerned about their workforce, and a decrease in demand.
Finally, the rapid, blunt attempts to make the government more efficient also causes uncertainty about the ability of the government to function and administer government programs. Publicly traded companies are lowering their forecasts for earnings as the year progresses due to this uncertainty and the effect on consumers’ ability and desire to continue to spend. All of this creates a Great Uncertainty.
The stock markets reacted swiftly to this uncertainty, with S&P 500 falling roughly 10% from its recent highs. The 10-year Treasury yield fell more than 50 basis points on recession fears before stabilizing around 4.3%. Future markets now predict that the rate will be stable for the remainder of 2025, as recession risks and higher prices caused by tariff-driven inflationary pressures counterbalance each other.
What does this mean for CRE and the Great Reset? On one hand, uncertainty typically drives up risk premiums for CRE assets, including an increase in credit spreads. If economic growth slows and unemployment increases, landlords may struggle to raise rents, and vacancy rates could climb across all asset classes. There may also be an increase in operating costs, especially for major operating costs like real estate taxes, insurance and repairs and maintenance. If long-term yields stabilize at 4.3%, and cap rates increase due to increased risk premiums, property values will decline, slowing transaction activity as lenders and owners seek clarity before making decisions, thereby slowing the pace of the Great Reset.
On the other hand, the Great Uncertainty, combined with increased supply in certain markets—notably multifamily in the South and industrial in low-barrier-to-entry markets—could create buying opportunities for the many distress funds that have been raised to take advantage of the Great Reset. This will only occur, however, if lenders force owners that are over-levered to finally market the properties for sale and accept the destruction in equity caused by the Great Reset. These new buyers, and the lenders that support them, will be acquiring properties at a lower reset basis positioning themselves for future gains.
In addition, there may be less supply in the future. Construction costs have already increased dramatically over the past few years, and tariffs and deportations of construction workers, which will only exacerbate the already existing construction labor shortage, add to these inflated construction costs, making development harder to pencil. These challenges, along with the Great Uncertainty, will ensure that there is very little new supply in 2026 and 2027.
The investors that have the fortitude to buy properties at a lower basis at this time (and the lenders that support them) will survive the Great Uncertainty and ultimately thrive. In the post-Great Uncertainty world, the excess supply will be absorbed (and little new supply will be added), rents will increase, and credit markets will be stable, benefitting those who capitalized on the Great Reset.
The above material has been provided for informational purposes only, and should not be relied on for tax, legal, or accounting advice. You should consult with your own tax, legal, and accounting advisors in addressing any of the above information.
John Barkidjija, is Head of Commercial Real Estate in the Chicago office of Byline Bank.
