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The economy isn’t liking tariffs— at least based on the stock market reaction. In the near term, the higher cost on imported goods will be passed onto consumers and producers and thereby nudge up the inflation rate. The higher inflation in turn will prevent the Federal Reserve and the longer-term interest rates from falling meaningfully. All the while, commercial real estate pressingly needs lower interest rates. Close to $1 trillion in commercial loans are coming due for refinancing this year
Over time, however, the inflation rate may subside. A steady boost in U.S. production—in some sectors because of tariffs—along with less federal regulation and more domestic energy production— could make inflation a non-issue. Moreover, the ongoing oversupply of multifamily housing unit completions will dampen rent growth.
The 10-year Treasury benchmark rate appears to have peaked. As of early March, it is at its lowest level since the election of President Trump. Commercial interest rates and the average cap rate will therefore be at least 50 basis points lower compared to the recent cyclical peak in mid-January. In addition, cutting government spending will dent the growth in national debt. More capital can then be available for the private sector. There are growing signs of more CMBS issuance. Commercial real estate prices have also been inching higher after the nasty tumble of the past two years. The recovery may not be robust, but it is happening.
