Commercial real estate buyers and sellers watching the market for the optimal time to make a deal might want to act sooner rather than later, according to John Chang, chief intelligence and analytics officer at Marcus & Millichap.
Multiple forces are increasing the likelihood of the 10-year treasury rising above 5% by the end of the year, including Moody’s downgrade of U.S. credit, financial market volatility and broad-based uncertainty. Plus, there's the movement of foreign capital away from U.S. treasuries and dollars, political uncertainty, including unresolved trade and tariff policies and a foggy picture for the federal budget in 2025.
The Congressional Budget Office projects a $1.9 trillion increase in the federal deficit for 2025, which will require increased Treasury issuance.
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“But that presents a bit of a problem,” said Chang. “The pool of buyers for those Treasuries may be limited.”
The Federal Reserve is reducing its balance sheet, allowing about $5 billion in Treasuries to mature monthly without reinvesting. At the same time, International demand for U.S. Treasuries is waning, with Japan’s holdings falling from $1.3 trillion in 2021 to $1.1 trillion today and China reducing its holdings from $1.3 trillion in 2013 to $765 billion today.
Another major lever is what the central bank does with the overnight rate, said Chang. The federal funds rate currently stands at 4.25%, unchanged since December 2024, but Fed Watch predictions point to a 75% chance of at least a 50-basis-point cut by the end of 2025.
“However, based on what the Fed chairman Jerome Powell has been saying, I'm not so sure that we'll see any cuts from the Fed this year,” said Chang. “I think the Federal Reserve is much more concerned about trade policy-driven inflation risk than they are about recession risk, at least for now.”
All in all, there is a greater probability that rates will rise, according to Chang. For buyers, that means it is advisable to lock in loan rates early to hedge against increases, and for sellers, rising rates are likely to push cap rates up, potentially eroding property prices, he said. Chang cautioned that waiting on the sidelines is not always advantageous.
“At the end of the day, there are still a lot of properties available that offer positive leverage or have a pathway to positive returns on debt over a relatively short time span if value is added to the property,” he said.
The greatest value creation in the current environment is likely to be through property upgrades, management improvements and tenant mix, Chang further noted.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
