For much of 2025, the commercial real estate sector has braced for aftershocks from the Federal Reserve’s campaign to tame inflation. But while the front end of the yield curve caught a 25 basis point breather this month, the real market narrative is now coming from the opposite end. Long-term Treasury yields surged, triggered by the Fed, signaling that policy loosening is nowhere on the near-term cards. The result has been a classic “bear steepener”—a yield curve steepening driven by higher long-term rates rather than lower short-term ones—and a direct jolt to CRE valuations and deal dynamics.
The Return of Duration Risk
Seasoned practitioners understand what comes next. Stephen Bush of Trepp put it plainly in a recent company podcast:
“The Fed...pushing the term premium up on the long end as long end yields have reminded everyone that duration still bites, and for CRE that keeps the buyer-seller gap wide,” he said.
For investors and operators who weathered earlier cycles, the lived experience of duration risk is back in stark relief. The gap between the 10-year and two-year rates widened by about 15 to 16 basis points in the latest week, shaking assumptions about the trajectory and the risk-free cost of capital.
Dealmaking Caught in the Crossfire
Dealmakers on both sides of the table are feeling the effects. Even as sellers have reluctantly softened price expectations over the past two years, the resurgence of long-end yield volatility stalls momentum.
“We have narrowed that massive bid-ask gap significantly over the last two years, so maybe we’ll see a little bit widening back out,” Bush noted, hinting at a renewed standoff as the buy-side gets more defensive and underwriters grow selective. Sectors heavily exposed to duration—the ones reliant on tight cap rate spreads or pro forma-driven business plans—are especially vulnerable.
Selective financing is now the new normal. Lenders who were already cautious are re-examining every assumption behind NOI, rent growth and expense projections. The kind of value-add or short-hold strategies that rely on a benign rate environment, or easy refinancing at maturity, simply “aren’t going to pencil” in the current climate, the Trepp team observed. The momentum is shifting toward “patient capital, durable cash flows and business plans with multiple off ramps,” as Bush described it. Investors with dry powder who can look past next quarter’s turbulence are likely to be the main winners in this reshuffling.
Cap Rate Drift and Selective Capital
Another real consequence is cap rate drift. As Trepp’s analysis highlighted, the path for cap rates is “obviously with a lag,” but the pressure is tangible in markets with liquidity constraints or a heavy reliance on short-term debt. Core assets with strong credit tenancy will “still clear,” but properties with secondary risk profiles or aggressive business plans now face steeper hurdles.
“Financing will remain selective, and some of those value-add business plans that rely on quick expansion are still not going to pencil,” Bush said, capturing the sentiment of capital allocators on the front lines.
Preparing for More Volatility
With the cost of time rising sharply, investors and operators are recalibrating their strategies. Deal volume could pause as both parties try to determine where the floor is. The margin for error, especially on transitional debt and bridge financings, is narrower than it’s been in years. And in the coming months, eyes will be squarely on macro policy as the Fed weighs the balance of economic data, fiscal uncertainty and global capital flows.
For now, the steepening yield curve is a reminder that the cost of capital remains a living variable—one that all parties in commercial real estate must track in real time, not just in spreadsheets, but in every negotiation and underwriting model. Those who misread the signals may find themselves on the wrong side of the duration trade, with little room to maneuver if policy and markets turn even less predictable in the new year.
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