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Resilience and Risk: navigating CRE valuations in an unprecedented tariff-laden environment

April 14, 2025 | 5 min read
Rich Hill
Global Head of Real Estate Research & Strategy
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Private commercial real estate (CRE) markets face a fresh wave of uncertainty following the announcement of sweeping new tariffs on U.S. imports that have been on-again and off-again in recent days. We are sympathetic to questions regarding what’s next for private CRE prices as the modern CRE market, which, as we know it today, didn’t exist 100 years ago when trade levies were last at these levels. There isn’t a historical playbook to anchor views. In such times, especially given very fluid market dynamics today, it’s helpful to outline a framework that evaluates the potential impact on the CRE market.

  • Our base case calls for unlevered CRE total returns to muddle along as income returns help offset a decline in capital returns.
  • Our bull case calls for high single-digit total returns as tariff tensions de-escalate. The best returns historically occur in the aftermath of significant drawdowns like what has already occurred.
  • Our bear case sees total returns falling an additional -10% as the market prices capital return declines like the S&L crisis / GFC as interest rates are shocked higher.

Keeping fundamentals and a framework in focus amid the time of tariffs

Valuations are already on the defensive: Private unlevered CRE capital returns (i.e., prices) have already declined roughly 20% from their peak in late 2Q 2022 (as measured by the NCREIF Property Index or NPI), driven by the sharp reset in interest rates (and have only recently turned positive over the past couple of quarters). While that, in and of itself, is not a reason to say that property prices will be insulated from the impact of tariffs, we note that it’s an atypical reaction for CRE prices to reset lower while the economy was on a firmer footing. In other words, we think the CRE market has already priced in a shock that many other markets have not. As we look forward, we believe there are three important factors to consider about this downturn.

First, the new supply of buildings is set to decline rapidly: It’s important to remember that a key historical catalyst for declining CRE valuations is an overbuilding of commercial real estate leading into an economic downturn. New development of CRE is driven by rising demand for space, pushing net operating income (NOI) growth higher while lending conditions are loose. These conditions do not exist across most property types today, as CRE has been an asset class that has been out of favor for more than two years. Indeed, the supply of new construction was expected to decline significantly in the coming years, even before the recently announced tariffs.

Second, NOI growth is expected to slow but remain positive: While a weakening economy may lead NOI growth to decelerate from today’s mid-3% range to below the historical average of 2.5% to 3%, we don’t expect it to turn decidedly negative as it has in other economic downturns. Commercial real estate is largely insulated from the direct impacts of tariffs, and the contractual long-term leases create more durable cash flows. Furthermore, CRE is a less cyclical asset class than 15-20 years ago, given the emergence of new property types. For instance, 60% of the U.S. REIT market cap is now concentrated in NextGen property types such as data centers, cell towers, single-family rentals, and seniors housing. In our view, it would take a significant bankruptcy shock to change this fundamental backdrop.

Third, CRE balance sheets are generally healthy: The balance sheets of commercial real estate owners are on much firmer footing than they were during the Global Financial Crisis. For instance, U.S.-listed REITs have loan-to-value ratios of approximately 35%, and open-ended funds that own core commercial real estate (i.e., ODCE funds) are even lower, at less than 30%. We see signs of stable liquidity in the CRE debt markets as lenders are still comfortable lending on valuations that have reset lower, although they are backing up spreads given market volatility.

Our base, bearish, and bullish cases for CRE in unusual times

Against this backdrop, our base case is that property valuations muddle through 2025. While capital returns may face headwinds in the coming quarters, income returns of ~1% per quarter are an overlooked offset. This may seem bullish given recent developments, but it was not too long ago that some hoped for a more robust recovery as the best returns for U.S. commercial real estate historically occur in the aftermath of significant drawdowns such as what we’ve seen since late 2022. Real estate may be a relative haven in these volatile markets: it’s the sixth best of the 11 S&P sectors year-to-date as of the week ending April 11, 2025, and REITs are outperforming the S&P 500 by approximately +358 bp and +834 bp versus the NASDAQ so far in 2025. That said, we anticipate inconsistent performance across property types, with industrial, hotels, and discretionary retail likely facing the most significant headwinds. At the same time, seniors housing, single-family rental, and manufactured housing are better positioned in this tariff climate.

Our bearish case is a rising interest rate shock where lending conditions tighten and NOI growth meaningfully slows. This is most akin to stagflation, which has historically not been a constructive backdrop for CRE. We think this has the potential to pressure CRE unlevered total returns an additional -10% lower, bringing cumulative capital return declines since 2022’s peak to more than -30%. As a reference, during the S&L crisis of the early 1990s, unlevered capital returns (i.e., prices) declined by -32% with total returns of -11%, and during the GFC, unlevered capital returns fell by -32% with total returns down -24%. At the risk of whistling past the graveyard, today’s environment does not feel as severe as these two prior environments as we aren’t dealing with a CRE credit crisis. And for investors who may be wondering how CRE performed in the late 1990s when the Russian Debt Crisis shocked 10-year treasury rates higher, private CRE valuations continued to rise as the sector was still in the relatively early innings of recovering from the S&L crisis (not unlike today).

On the other hand, our bullish case scenario for CRE sees unlevered returns rising in line with the historical average based on rolling average 10-year CAGRs of ~8%. This is predicated on NOI growth remaining relatively stable, improving lending conditions, and interest rates declining as tariff tension de-escalates. CRE outperforms in this scenario because it is not only a haven in such a scenario, but also cheap given the current drawdown from peak. While the damage may have already been done to the economy, there’s precedent for U.S. CRE to outperform even as the U.S. moves into a recession and risk assets sell off, as evidenced by the early 2000s. Capital markets may be volatile over the short term, but we underscore that abstracting their reactions is not always a good idea for projecting longer-term valuations and fundamentals. That seems especially true during unprecedented times such as these.

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