By Dan Levitt, Ryan Cos.
If it feels like the commercial real estate market has been running in place for the last three years, you’re not alone. There has been a sense of anticipation, and even inaction, that has defined the landscape as we waited for catalysts that have yet to materialize.
Many of us have been distracted, looking for silver bullets in Federal Reserve rate cuts, anticipating a flood of distressed deals or chasing niche returns in preferred equity. However, these distractions have obscured possible opportunities. To break the stalemate and drive the next recovery, we must shift our focus from these mirages and get back to the fundamentals of traditional equity investing.
The 10-year reality
The most widely accepted misconception in our industry right now is that Federal Reserve rate cuts will serve as the silver bullet for commercial real estate — though expectations for rate cuts have diminished significantly lately. Over the past several years, even as short-term interest rates have come down by over 150 basis points, we’ve seen headline after headline anticipating that new reductions to the federal funds rate will compress cap rates and send valuations rising again.
This notion fundamentally misinterprets how institutional real estate is valued. While lower short-term rates provide immediate relief to borrowers with floating-rate debt or active construction loans, they are not the primary driver of asset valuation. That role belongs to the 10-year Treasury yield.
To understand why, we have to look at the basic math of real estate pricing. Capitalization rates do not exist in a vacuum; they are built upon the “risk-free” rate of the 10-year Treasury, adjusted for perceived net operating income (NOI) growth, plus a risk premium to account for the illiquidity and operational risks of real estate in general and the specific asset in particular. So, though not a one-to-one correlation, the movement of the 10-year Treasury materially influences cap rates.
Over the past two years, the 10-year Treasury has settled into the low-to-mid 4 percent range. While we have seen recent fluctuations at the higher end of that spectrum, given the current economic environment, this remains a rational baseline by historical standards. For context, we saw the 10-year peak near 5 percent during the height of the recent inflation scare and a sub-2 percent anomaly in 2020 and 2021. The current range represents a return to the long-term historical relationship between the 10-year rate and inflation. If the risk-free base rate remains sticky, cap rates must also remain elevated to maintain an acceptable investment return.
Because property valuation is simply NOI divided by the cap rate, a sticky 10-year Treasury means we will not see a sudden, cap-rate-driven surge in valuations. Values have reset. Barring a severe macroeconomic shock that forces long-term yields back to pandemic-era lows, investors will be waiting a very long time for lower cap rates. Moving forward, value creation will have to come the old-fashioned way: through NOI growth, disciplined cost management and new development — not historically low interest rates.
Defused debt maturity wall
The second misconception was the much-feared wall of debt maturities. For the last two years or so, opportunistic capital has been anticipating that mid-2020s loan maturities would trigger massive defaults. The expectation was that a flood of high-quality, distressed assets would hit the market at steep discounts.
Except for the office market, this expectation never materialized at scale. The flaw in this prediction was underestimating the pragmatism of the lending community, the resilience of borrowers and the considerable rebound of the debt markets. Many institutional lenders have resisted taking back the keys to functioning industrial, retail or multifamily assets because the current cost of capital is temporarily straining debt-service coverage ratios.
Instead, we have seen lenders grant extensions and rework covenants to give sponsors breathing room. For example, over the last 18 to 24 months, lenders have structured short-term maturity extensions, often granted in exchange for the sponsor injecting a modest amount of fresh equity or purchasing new interest rate caps.
More recently, the broader debt markets have become astonishingly liquid across all lender types, lowering spreads and providing fresh takeout loan options. Healthy assets with strong sponsors have successfully navigated the refinancing process, effectively neutralizing the maturity wall threat.
A return to common equity
In the broader search for yield, many capital allocators pivoted to preferred equity. Recognizing the capital stack challenges and risks to common equity during the run-up in interest rates, institutional investors sought to bridge the gap by offering preferred equity. It looked like the perfect solution on paper — a way to achieve low-teens returns without taking on traditional common equity risk.
The problem is one of supply and demand. The owners of top-tier, institutional-quality properties — the exact assets these investors want to be in — were not necessarily in the market for expensive rescue capital. Most found alternative ways to weather the storm.
While preferred equity works in specific, niche recapitalization and development scenarios, there simply aren’t enough of these to satisfy the billions of dollars of institutional demand.
This fact brings us to an inflection point. Institutions still have capital to deploy. We are now seeing the inevitable correction: Investors are recalibrating their alternatives. To achieve their required yields, they are again reviewing opportunities in the common equity space.
As core property sales slowly rebound, investors are gaining renewed transparency into market cap rates. Price is the key information metric in a market economy. With improved insight into market cap rates, investors can reduce their uncertainty premium and underwrite their opportunities more aggressively.
Consequently, we are seeing the beginning of a return to standard joint ventures, with capital partnering directly with developers and operators to fund new projects that will deliver or be repositioned into a supply-constrained market.
What comes next?
The commercial real estate market will rebound, but it will not be driven by slashed long-term rates, distressed fire sales or preferred equity. It will recover because current market participants are accepting the math of a normalized environment.
For investors willing to move into development, this reset presents a tactical advantage. Because new development has been highly constrained over the past three years, we are approaching a future supply-demand imbalance in fundamentally strong sectors such as industrial and multifamily.
Opportunities today lie in selectively deploying equity into ground-up development to capture that prospective demand and judiciously acquiring core assets at today’s stabilized, realistic valuations. By acknowledging the reality of the 10-year Treasury, underwriting to today’s cap rates and returning to the basics of common equity joint ventures, we can stop waiting for a bailout and start capitalizing on the next cycle.
Dan Levitt is executive vice president of capital markets with Ryan Cos. This article originally appeared in the July 2026 issue of Heartland Real Estate Business magazine.