The Cost-of-Capital Crisis

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U.S. economic growth slowed to 1.5% in the second quarter, as economists revised 2026 GDP projections down to between 1.6% and 2.1%. While the pace of growth has slowed, these projections still support an expanding economy, which is constructive for real estate. However, the impact of AI on GDP and employment remains uncertain. The U.S. unemployment rate (4.2%) has remained stubbornly resilient amid a slowing economy, rising inflation, AI, trade constraints, and geopolitical uncertainty. In light of persistent inflation and the historically low unemployment rate, Kevin Warsh’s decision to hold rates was welcomed by commercial real estate investors, particularly with a growing caucus of hawkish governors who voted for rate increases.
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“In economics, interest rates act as gravity behaves in the physical world.”

– Warren Buffett
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At the long end of the curve, the 10-year Treasury yield has risen more than 70 basis points from its Q1 low, signaling potential pressure on commercial real estate values. With benchmark rates, including the federal funds rate and U.S. Treasury yields, potentially remaining structurally higher, CRE transaction volumes remain sluggish and investor returns continue to face the downward pull Warren Buffett described: “In economics, interest rates act as gravity behaves in the physical world.”

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On the variable cost-of-capital side, banks and investors continue to absorb a portion of recent rate increases. This has moderated the rise in loan interest rates and helped limit further declines in property values. However, we expect more legacy loans to be liquidated over the next 24 months, renewing interest among real estate equity investors. Meanwhile, competing yield opportunities in corporate and sovereign bonds, along with a recovery in CRE equity, are likely to divert capital from commercial mortgages. This shift should improve supply-and-demand dynamics for private real estate credit and provide some spread relief over the next 24 months.

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The chart above compares global real estate equity and debt returns reported by MSCI. Returns for both strategies remain under pressure. Although real estate debt funds continue to outperform, their returns have also declined as lending markets have become increasingly competitive.

Global real estate equity returns have remained largely flat over the past three quarters. This follows several strong months in the first half of 2025, which helped the real estate funds index generate a 2.5% annualized return and record its first positive result since 2022. Private credit funds continue to offer comparatively stronger returns, but we expect the performance gap to narrow as real estate markets recover.

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Complexity is the Moat – and the Risk

Capital has returned to the market broadly enough that simple, stabilized collateral is again being competitively bid. Q1 2026 originations rose 52% year over year, investor-driven lenders grew 133%, and large banks reported easing standards for precisely the transactions that require the least work. Where execution is commoditized, spread follows.

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