"There's no doubt that commercial real estate, and especially the office market, is undergoing a seismic transformation, one that's not likely to abate any time soon. A boom time of near-zero-interest-rate policy, abundant liquidity, and cap rate compression over the past decade has given way to a perfect storm-a wall of maturing debt, tightened lending conditions, and cratering property values-all amid higher interest rates that show no sign of returning to their pre-2022 lows."
"The outlook for the office sector has been particularly negative. It's a tale of two markets right now: roughly 30% of office buildings account for 90% of the vacancies and may never recover, while the other 70% have the chance to stabilize over time. Either way, the office market finds itself at an inflection point, much like the retail market as mall acquisitions were being financed."
"It's equally clear that this total reset won't reverse itself any time soon as the cost of capital will remain elevated for the foreseeable future. Using a forward yield curve to track the U.S. 10-year Treasury, we can forecast yields rising from 4.46% in July 2025 to 5.78% in July 2035. Inflationary pressures will persist, and the historically accommodative monetary policy of the past decade will not spring back to life. The genie can't be put back in the bottle."
Commercial real estate, particularly the office sector, faces a prolonged transformation driven by maturing debt, tightened lending, and collapsing property values after a decade of near-zero rates and cap-rate compression. About 30% of office buildings account for 90% of vacancies and may never recover, while the remaining 70% could stabilize over time. Forward Treasury yields are projected to rise, keeping the cost of capital elevated and inflationary pressures persistent. Banks have sharply reduced CRE lending, increasing dislocation. Special-situation investing that steps into stressed assets and financing gaps is positioned to capitalize on these market inefficiencies.
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