Worries have been swirling around the commercial real estate sector as tariff increases and global uncertainty loom, but so far, the data has painted a mixed picture of their direct impact.
Despite major players like Blackstone acknowledging that tariffs have influenced their commercial real estate investments, the market has largely remained stable, according to John Chang at Marcus & Millichap. Yet, some experts believe the warning signs may just be beginning to surface.
MSCI’s Jim Costello, writing in a recent blog post, noted that while the effects of “tariff turmoil” haven’t become glaringly obvious, early indicators are flashing signals that trouble could be ahead. The slow-moving nature of commercial real estate—where deals can take more than six months to close—means that any fallout from tariffs might not be fully visible until the third quarter of 2025. Still, Costello argues that certain metrics can already offer a glimpse of how the sector might respond to broader economic shocks.
One such metric is the daily spread between the 10-year Treasury Note yield and Moody’s Baa corporate bond rate. This gap, which reflects how much extra yield investors demand over the risk-free rate, peaked at 30 basis points and has climbed by 10 basis points since tariffs were announced, up 40 basis points since the start of the year. Historically, Costello points out, a 100-basis-point increase in this spread has led to an 85-basis-point rise in the office cap rate spread to the 10-year Treasury within a year. The jump in the spread after April 2, 2025—the day former President Trump announced higher tariffs—suggests growing investor concern.
Liquidity is another crucial factor. Without it, deals grind to a halt. Costello warned that liquidity could evaporate in certain sectors, forcing investors to rebalance their portfolios and potentially absorb losses. “The rationale varies, but at a fundamental level, if countries are prevented from exporting to the U.S., they will not have U.S. dollars to recycle into U.S.-dollar-denominated assets,” he explained.
MSCI’s Capital Liquidity Scores, which track cross-border investor activity, show that these deep-pocketed buyers—who typically pay the lowest cap rates—accounted for 7.2% of capital flowing into direct office purchases across 54 markets in 2024. However, relative office market liquidity slipped slightly in the first quarter of 2025 as sector cap rates widened.
Assessing the impact on property income is challenging, since office leases are long-term and negative effects on net operating income take time to materialize. In contrast, hotels reveal problems faster, as room rates are adjusted daily. “The fact that deal volume for hotels fell 52% from a year earlier in April should introduce a sense of caution for other sectors,” Costello cautioned.
He also observed growing frustration among industry professionals at recent conferences. While market metrics may not yet capture this sentiment, Costello believes, “the writing is on the wall.”
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