CRE Capital Flows Stabilize: Debt Markets Evolve Post-Rate Hikes

By Majid Radaei, RadCRE · · Industry Insights

Q4 2025 saw a marginal uptick in U.S. CRE transaction volumes, signaling stabilization. Debt markets are recalibrating with SOFR hovering around 4.31%, shifting strategies for investors.

Q4 2025 Sees Glacial Thaw in CRE Investment Activity

After a prolonged period of suppressed transaction volumes, the U.S. commercial real estate market began to show nascent signs of stabilization in the fourth quarter of 2025. According to MSCI Real Assets (formerly RCA), U.S. CRE investment sales volume for Q4 2025 dipped only marginally by 2% year-over-year, a significant improvement from the double-digit declines seen in earlier quarters of 2024 and 2025. This relative stability suggests that buyers and sellers are slowly bridging the bid-ask spread, albeit cautiously.

The institutional investment landscape continues to be dominated by private capital and high-net-worth individuals, who are often better positioned to transact in a turbulent debt market. Public REITs and large institutional funds, reliant on broader capital raising and tighter underwriting disciplines, remain more selective. While overall transaction volume for 2025 closed at approximately $380 billion, a substantial decrease from the 2021-2022 peaks, the slowdown in the rate of decline indicates a potential floor forming in certain asset classes.

Debt Markets Recalibrate: Bridge Lenders Adapt, CMBS Spreads Fluctuate

The lending environment remains a critical determinant of capital flows. With the Secured Overnight Financing Rate (SOFR) consistently hovering around 4.31%, and Prime at 8.50%, floating-rate debt continues to be a primary concern for borrowers. Bridge lending, which saw a boom during the low-rate environment, has recalibrated significantly. Lenders are demanding higher spreads, often in the range of SOFR + 300-600 basis points, alongside lower leverage ratios, typically 55-65% Loan-to-Cost (LTC).

CMBS issuance, while still below pre-2022 levels, demonstrated a modest comeback in late 2025. Trepp reported an uptick in new conduit deals, with CMBS single-asset, single-borrower (SASB) and conduit spreads for investment-grade tranches tightening slightly but still maintaining a premium over historical norms, often T + 150-300 bps for comparable assets. This reflects increased lender caution and higher risk premiums.

Regional banks, still navigating balance sheet issues and increased regulatory scrutiny, have largely retreated from aggressive CRE lending, focusing on existing relationships and lower-leverage, shorter-term deals. This has opened opportunities for debt funds and private credit firms, particularly for value-add or transitional assets where traditional banks are hesitant.

Sectoral Performance and Investor Preferences

Industrial assets continue to attract robust capital, albeit with fewer mega-portfolio deals compared to previous years. Prologis recently announced the acquisition of a 1.2 million square foot logistics portfolio in Southern California for an undisclosed sum, indicative of continued demand for last-mile and distribution centers. Multifamily, while facing some headwinds from new supply and higher interest rates impacting affordability, remains a favored asset class for long-term investors. Conversely, office continues to struggle, with cap rates continuing to expand, prompting distressed asset specialists to explore acquisition opportunities at significant discounts.

Hotel investments are experiencing a nuanced recovery. Select-service hotels in leisure-driven markets or strong business travel hubs are performing well, supported by resilient RevPAR growth. Full-service convention-oriented hotels, however, face a longer road to full recovery, challenged by corporate belt-tightening and hybrid work models impacting Group segment demand.

RadCRE Perspective

"The market is past the initial shock of interest rate hikes, and what we're seeing now is a re-establishment of price discovery, albeit a slow one. Many institutional players had been on the sidelines, trying to time the bottom. But the reality is, the bottom is a range, not a precise point. For our clients, particularly in the hotel sector, we advise a nuanced approach to financing. While SOFR + 300-600 bps for bridge debt might seem high, it’s often the most flexible capital for transitional assets that need repositioning or reflagging. We're actively structuring deals with preferred equity or junior mezzanine tranches alongside senior debt to optimize the capital stack, especially when LTVs of 60-65% are proving insufficient for a deal's viability. Finding the right blend of bank, debt fund, and private capital is key. We recently advised a client on a $45 million hotel acquisition, utilizing a combination of a regional bank senior loan at SOFR + 275 bps and a private debt fund's mezzanine piece at 14% to achieve an effective 70% LTC. Don't chase the cheapest capital if it doesn't align with your asset's business plan; focus on certainty of execution and flexibility."

— Majid Radaei, Founder of RAD Commercial Realty

Outlook: Cautious Optimism and Strategic Capital Deployment

The outlook for 2026 suggests a continued gradual thawing of the CRE investment market. Interest rate stability, or even modest declines, could unlock pent-up capital. However, investors will prioritize assets with strong fundamentals, clear value-add opportunities, and robust income streams. The distressed market, though not yet a flood, will present strategic opportunities for well-capitalized buyers and those adept at navigating complex capital structures. RadCRE remains committed to guiding clients through these evolving market conditions, leveraging our deep expertise in hotel investment sales and comprehensive capital markets advisory to identify and execute on compelling opportunities across all asset classes.

Tags: commercial real estate financing, CMBS spreads, bridge lending, hotel investment sales, CRE capital markets, distressed assets, SOFR trends, private equity real estate

Sources: MSCI Real Assets, Trepp, CoStar, Commercial Observer, Prologis investor reports