The Federal Reserve did something in September that it hasn’t done in more than three years: it raised rates by a quarter point. Under Chair Kevin Warsh, the first hike since 2023 dropped into commercial real estate like a pebble into a very still pond, and the ripples are reaching every market. Kidder Mathews professionals across the Western U.S. and Texas weighed in on what they’re seeing. Their collective verdict: the market isn’t frozen, but it is picky, and the winners are the ones who stopped waiting for rates to rescue them.
The Hike Heard Across the Market
Deals haven’t disappeared, but they’re harder to land. Kidder Mathews VP in Irvine, Eric Shain, says the market feels “a little stuck,” with every piece needing to line up, and buyers turned more conservative after the recent jump in Treasuries. Kidder Mathews SVP in Dallas, Brandon Beeson, has watched retail deals collapse, including a three-tenant sale that died when rates rose while the buyer was slow on the contract. His rule of thumb: when the 10-year climbs 100 basis points, cap rates need to move up roughly 50 bps to deliver the same returns. That math likely cost one recent deal about $1 million, with the 10-year up 100 bps since his team’s June valuation.
Kidder Mathews VP in Bellevue, Jay Bennett, describes a market in a holding pattern, waiting on tariffs, elections, and conflicts abroad. A year ago, inflation was falling and rate cuts looked routine. Now, he says, “the water is murkier,” though he expects things to break loose within a couple of months once “we have better line of sight on Kevin Warsh’s plans.”
Pricing is where the tug-of-war plays out. Kidder Mathews SVP and Managing Director in Dallas, Mart Martindale, says buyers have already adjusted while sellers have been reluctant to meet them. Kidder Mathews SVP in San Diego, Paula Danker, sees the gap narrowing considerably, though resistance lingers where sellers anchor to the historical value of the property rather than the property’s current risk-adjusted return. Kidder Mathews SVP in Phoenix, Nathan Thinnes, says buyers finally have leverage and are using it, raising exit cap rates and pressing prices. In Portland, Kidder Mathews EVP, Jordan Carter, says, “there isn’t a corner of the multifamily market that today’s rate environment hasn’t touched.” He reports average multifamily pricing has fallen from $320,000 per unit at the 2021 peak to $183,000, a 43% drop.
Not every deal is a grind. Shain says single-tenant deals with older leases and below-market rents are moving “extremely fast,” as are value-add centers with low rents and some vacancy, because buyers can see the upside. Western retail fundamentals remain strong, he adds; the challenge is pricing and the cost of capital, not the real estate itself.
The financing advice is refreshingly consistent: underwrite today, not tomorrow. Kidder Mathews SVP in Portland, Rebecca O’Leary, advises clients not to count on a refinancing miracle, and warns that a 6.5% cap rate doesn’t necessarily mean much if borrowing costs approach or exceed that return. Kidder Mathews SVP and debt and equity expert in San Francisco, Jim Henderson, urges borrowers to lock rates, stay close to their lenders, expect that lenders may require additional equity to keep loans “right sized,” and avoid those who “retrade” loans midstream. Bennett calls short-term debt taken on in hopes of cuts misguided.
Who’s Buying, Who’s Selling, and Why
Capital is out there, but it’s selective. Martindale says institutional money is chasing quality, lower-risk assets while private capital hunts for value-add. Bennett sees institutions drifting back off the sidelines as seller expectations converge with buyers, with private money returning as well. Cash and 1031 buyers hold a clear edge, O’Leary notes, because they aren’t “trying to force today’s financing costs into yesterday’s pricing.” Carter says Portland buyers are more opportunistic and gravitating toward post-2000 buildings with predictable cash flow. Beeson reports that everyone in retail is active, but cautiously. In office, Thinnes warns that costlier money will push already elevated tenant improvement costs higher, and large vacant blocks “will carry very little value with investors.”
On the sell side, necessity is the mother of listings. Carter’s “Six D’s” tell the story: Debt, Distress, Death, Divorce, Dissolution (of partnerships), and Disillusionment. Owners with adjustable-rate debt are most exposed, he adds, with Portland rents essentially flat for several years while operating expenses climbed roughly 40% over the last five years. Beeson says forced sales dominate while voluntary ones crawl. Martindale points to owners who bought at the 2021 to 2022 peak and now face maturities they can’t easily refinance, and Bennett says debt is driving the office reset. Shain adds a California twist: some owners simply want to move capital out of state.
Then there are the sellers who can afford to wait. O’Leary notes that many Pacific Northwest owners have held for decades with little debt, so for them the question isn’t what cap rate they can sell at but “What am I going to do with the money?” She describes Oregon investors who planned a 1031 exchange into Texas until a lender quoted them a rate in the high 6% range. They’re still willing to sell, she says, but they don’t need to. Her takeaway: rates aren’t necessarily stopping deals, they’re raising the bar for sophisticated owners to do them.
Advice for Clients: Sell Smart, Buy Smarter
Our experts don’t entirely agree on timing, and that’s what makes it interesting. Shain says it’s a good time to sell, since cap rates are moving everywhere and sellers are buying back into the same market. His warning is not to fixate on the sale price and forget the buy side. Carter says selling now beats being forced to sell later, and Martindale, who helps lenders dispose of troubled assets, gives them the same counsel: “The first loss is usually the best loss.” Bennett looks at the other side of the table, noting pricing is at a cycle low and a buy position over the next year “will be powerful,” while patient sellers may see more buyers return as clarity improves. Carter adds that investors shouldn’t walk away from assets bought well below replacement cost just because early cash flow is thin.
Henderson notes that project economics will likely continue to erode as rates remain elevated indefinitely. That should create buying opportunities as lenders and investors look to recover their capital.
Whichever side you’re on, look at the dirt. O’Leary suggests asking whether you’d still want the property if the tenant disappeared, and Danker reminds net lease investors that the lease provides income while the real estate provides long-term value, which can often get lost in national statistics. “In many of our markets, land is scarce and expensive, and well-located commercial sites can have significant value independent of the existing lease. For buyers, I would encourage them to evaluate not only the lease and tenant credit, but also the location, zoning, surrounding investment and potential future uses. For sellers, understanding those same factors can help them better position an asset and communicate its full value to the market,” says Danker.
Local color matters too. Henderson says the Bay Area is “back, baby,” and that Silicon Valley continues to attract great capital. Bennett sees Seattle and the Eastside diverging: both carry heavy office vacancy, but only the Eastside has leasing momentum from incoming AI companies. Beeson notes Dallas-Forth Worth is somewhat sheltered, though Texas sellers still balk at the repricing.
The Bottom Line
O’Leary’s perspective sums up sound advice in an uncertain market where no one can say for sure whether rates are headed up or down. “Either way, I don’t think waiting for the ‘perfect’ interest-rate environment is necessarily a strategy. I would rather identify an investment that works under today’s assumptions and treat future refinancing opportunities as upside.”
Kidder Mathews’ voices agree more than they differ: underwrite to today’s reality, know your lender, respect the real estate, and move when the math works. Rates will do what rates do. The prepared will be the ones closing deals.
Key Takeaways
- Higher interest rates make commercial real estate deals harder to close without stopping them, as buyers grow more conservative, use their leverage on pricing, and push back on sellers who anchor to historical values.
- Investors should underwrite to current rates rather than expected cuts or a future refinancing. A common rule of thumb holds that every 100 basis point rise in the 10-year Treasury requires cap rates to rise roughly 50 bps for the same returns, and a cap rate means little when borrowing costs approach or exceed it.
- Capital remains available but selective: institutions favor quality, lower-risk assets, private capital pursues value-add, and cash and 1031 buyers hold an edge because they are not forcing today’s financing costs into yesterday’s pricing.
- Debt and loan maturities drive most forced sales, while long-term owners with little leverage can afford to wait, so higher rates raise the bar for deals rather than eliminating them.
- Timing views differ, but selling before being forced to sell is generally the better outcome, and buyers may gain an advantage when pricing sits at a cycle low.
- Real estate fundamentals matter as much as the lease or the rate environment, and waiting for a perfect interest-rate environment is not a strategy: underwrite to today’s reality, know your lender, and move when the math works.
Contact
Gary Baragona, Vice President of Research