Will Stability Win Over Volatility in 2026?

By Robert Slatt

Featured in Commercial Property Executive

Further rate cuts are an unknown, but conditions are improving for borrowers and lenders.

The capital markets are moving towards 2026 in relatively good shape. Whether or not last week’s Fed Funds cut was an economic necessity, it did not derail the market’s expectations—in and of itself a good thing.

Was the reduction warranted? The tea leaves do not show this was a unanimous decision in any way. While inflation remains above target and persistent, we have not been seeing big jumps. A softer labor market is a reality, but we are not in any way falling off a cliff. Treasury yields saw some upward pressure leading up to the recent Fed announcement but not extreme volatility after. The transition to a new Federal Reserve chair is still an unknown and potential disruption for next year. Until then, we should not anticipate additional near-term rate action. However, barring any unforeseen disruptions, we can expect a stable year-end with conditions carrying over into the new year.

Rate Climate

From a CRE standpoint the market has meaningfully stabilized. We have seen some marked improvement to the 10-year treasury since the summer, and that has translated into an uptick in refinance activity and property sales in the second of half of the past year. As important, the cycle’s current cost of capital is no longer a shock, and the market is adjusted. The rate has stayed in a consistent range between 4 percent and 4.2 percent since September. If this key benchmark remains between 4.25 percent down to 3.75 percent—a realistic hope—that range should support or even improve current transactional flow. SOFR is also an improving benchmark, benefitting directly from the string of 2025 Fed Funds rate cuts. That bodes well for improving the cost of capital on bridge and construction debt and other variable-rate loans.

Asset Performance

We have seen some softening in both multifamily and industrial properties, although both asset classes remain strong performers. Where there is softening, a lull in new development should allow for absorption in 2026 and a return to rent growth in the year ahead. Regional pockets continue to outperform in many instances. The strength of neighborhood and credit tenant retail has been buoyed nationally by the lack of meaningful new development in the asset class and by resilient consumer spending. These are the big three asset classes where lenders will compete with their best terms and spreads.

Self storage has also continued to be a targeted allocation for its steady performance, with a slowing development pipeline helping absorb extra space, stabilize new deliveries and support rents. Office is slowly recovering, particularly in key metros like New York and San Francisco, with a return-to-work movement and growth in AI fueling a flight to quality assets and space demand, making a case for value-add improvements and repositioning programs in lesser quality space. Hospitality continues to favor resort over business destinations and is still working through the realities of post Covid operations.

Transaction Flow

Deal flow is great right now for two different reasons. Distressed assets, acquired at a lower basis with rents to reflect, are finally making their way through the system in a meaningful volume. This is playing out most visibly in the office markets but is also true in the multifamily sector where a crop of post-Covid value add plays and high leverage investments are trading under their once speculative values or at a new basis reflecting the current cost of capital.

Looking ahead, 2016, and 2017 represented phenomenal borrowing years, so there will be a significant number of maturities relevant in the year ahead to drive refinance demand. These loans have come to the end of their cycle with sponsors ready to move on or repatriate equity. Sponsors that have been hesitant to transact are moving forward—no longer kicking the can or paying penalties to extend terms. If the key benchmarks remain in the current range, conditions are attractive again for permanent debt considerations.

Lenders

Money center banks stand to benefit the most from the recent Fed cut and have been more active in 2025 than in recent years. That trend should continue in 2026. They have meaningfully shored up their balance sheets and moved past the need for onerous deposit requirements that made their loans less appealing in recent post volatility years. Cheaper overnight borrowing is improving their bandwidth. However, banks are still struggling to compete on all-in rates and remain a recourse lender.

Insurance companies have become a strong alternative for permanent loans, and with spreads pricing lower as corporate bond yields have shrunk, these time-tested non-recourse lenders continue to offer all-in pricing at 30 to 50 bps below their banking competitors on fixed rate loans. Their streamlined underwriting, certainty of close and servicing reputation make them an appealing source for refinancing amortized maturities or acquisitions on legacy hold assets where debt service and leverage requirements align with equity on hand.

Debt funds and family offices have become more active in CRE debt and effectively compete with banks as a non-recourse alternative for bridge and construction loans in the current cycle. Their diversity makes their programs varied by asset type, region and return targets. Flexible underwriting comes at a price, as will interest-only terms and extension options, but their risk tolerance in pursuit of yield makes them an attractive source for these loans.

CMBS lenders continue to be a source for maximized proceeds at higher LTVs, but their financing comes with a heavy underwriting lift and the most uncertainty. Since they do not lock rate until the last day of closing, rate volatility can impact proceeds. However, if benchmarks stay stable or continue to improve, this will not be as disruptive as in previous years. An additional uncertainty includes the potential for B-piece underwriting to upend a smooth closing. CMBS can offer debt service aligned to full-term interest only, an expensive option to max proceeds. Ultimately, CMBS may be the only viable non-recourse option for many assets seeking to stabilize with fixed rate, permanent debt.

Finally, the GSE’s are underwriting to tighter standards but continue to have a nearly insatiable appetite for new loans, making them a highly competitive source for multifamily debt. Their best terms are reserved for loans meeting their affordability criteria. They can include interest only components. Rate buy downs are also available to increase proceeds.

Permanent Debt

The conditions for permanent debt have improved significantly in 2025, with benchmarks dropping and spreads coming in as lenders compete for loans. We are seeing increased interest again in 10-year loans as treasury yields have improved, with the recent cycle’s proclivity to opt for five-year debt still a popular choice for borrowers seeking flexibility in a future rate climate. Insurance lenders have responded to this strategy with new hybrid loans that offer prepayment flexibility after year five, and CMBS has responded with five-year term loans that are appealing for performing assets seeking max leverage. Banks will continue to price their debt at higher all-in rates, but their underwriting flexibility, including prepayment options and interest only terms, can still make them attractive for opportunistic buys.

Bridge and Construction Debt

The debt market for construction and new development remains liquid. The real challenge is aligning the current pricing of materials, labor, land and approvals with the necessary rents to support costs with attainable returns. Rents should improve as current inventories are absorbed and a lack of new project starts creates scarcity. That being said, expect that new starts will remain light in the first half as input pricing stabilizes to align with capital costs.

Bridge loans for projects still in transition or targeting a value-add play will be a ready choice in 2026, particularly for office assets moving through recovery or trading at a new basis for re-tenanting. These loans will price in both fixed- and variable-rate structures. As more private capital moves into the CRE lending space, options will abound. With replacement costs far exceeding renovation values, bridge debt will be an appealing and ready option.

Hesitation Penalties

One final consideration for 2026 is the avoidable costs we saw incurred in recent years on rushed maturity resolutions due to rate hesitation. Planning for maturities as early as possible opens the door to a desired outcome, and in this rate climate, if the performance supports debt service at current rates, it makes sense to take the loan and move forward. If the past three years has reminded us of anything, the stability we enjoy today could become volatile again tomorrow with a new policy shift or fast moving changes to global economic or geopolitical realities.