Real Estate · Retrospective
The 2022 cap rate and real estate valuation piece made a bold claim, stated with unusual directness for a research publication: "Given the extreme nature of variables in the current inflationary environment, it would be hard to imagine a scenario in which real estate valuations do not fall 30–40% in the near future." It is rare in investment research to make a prediction that specific about a market as large and heterogeneous as U.S. commercial real estate. Four years later, we can assess the call — and the answer is: broadly correct in direction and mechanics, partially correct on magnitude, and significantly underestimated in the divergence between property types.
The Fed's rate hiking cycle that began in March 2022 was the most aggressive in 40 years. The federal funds rate rose from 0–0.25% to 5.25–5.50% in 14 months. The 10-year Treasury yield, the risk-free rate that anchors cap rate calculations, rose from 1.5% in early 2022 to over 5% in late 2023. Real estate valuations, as our analysis predicted, fell substantially — but the distribution of that decline across property types has been far more uneven than a uniform 30–40% prediction implied.
CoStar's 2024 Commercial Repeat Sales Index showed multifamily valuations approximately 20–25% below their mid-2022 peaks — meaningfully less than the 30–40% we projected, in part because our analysis correctly noted that multifamily's short-term lease structure allows rents to reprice faster than long-term leases. Multifamily rents rose approximately 15–20% nationally between 2022 and 2024 before moderating, providing a meaningful offset to the cap rate expansion the rate hike cycle forced.
The 2022 piece briefly noted that "office and retail suffer from post-COVID structural changes" — but didn't model the full catastrophe that office has become. Office valuations in major gateway markets — San Francisco, New York, Chicago, Los Angeles — have fallen 40–60% from peak. San Francisco's office vacancy rate reached 36% in 2024, the highest recorded in the city's history. Buildings that traded at $800–1,000 per square foot in 2018–2021 have sold at $100–200 per square foot in 2024–2025.
The structural causes are now well understood and were not fully captured in 2022's interest-rate-focused analysis: hybrid work has permanently reduced average office utilization to 40–50% of pre-COVID levels in most markets. Remote work is not a COVID anomaly — it is a structural shift in how knowledge workers operate. Companies have responded by downsizing leases, not renewing, and accepting higher vacancy rather than paying for space their employees won't use. The combination of structural demand destruction and interest rate pressure produced declines well beyond 40% in many assets.
The result has been the largest commercial real estate distress cycle since the savings and loan crisis of the late 1980s. The CMBS (Commercial Mortgage-Backed Securities) delinquency rate for office loans reached 10%+ by late 2024, according to Trepp. Regional banks with heavy CRE concentration — many of whom were already stressed by the 2023 banking turmoil that claimed Silicon Valley Bank and Signature Bank — face ongoing credit quality deterioration from office loan portfolios.
Our 2022 prediction that "multifamily has particularly outpaced other property types" was accurate as a statement about 2022. But the mechanism we identified — that short-term leases allow NOI to keep pace with rising costs — proved only partially correct in the 2022–2024 period. The rent growth that multifamily operators captured in 2021–2022 was extraordinary by historical standards: RealPage and Yardi Matrix both documented annual rent growth exceeding 15% in Sun Belt markets. This provided a genuine offset to cap rate expansion.
However, by 2023–2024, multifamily supply came roaring back. The construction pipeline that developers had launched during the 2020–2022 demand surge reached completion en masse in 2024 — adding over 500,000 new multifamily units nationally in a single year, the highest volume since 1987. This new supply hit markets just as rent growth was decelerating, creating localized oversupply conditions in high-growth Sun Belt markets (Austin, Phoenix, Nashville, Charlotte) that drove rents down 5–15%. Operators who had underwritten assets at 2021 rent growth assumptions faced refinancing pressure they had not modeled.
The most acute near-term challenge for multifamily owners is what the industry has called the "maturity wall": approximately $1.2 trillion in CRE debt originated at near-zero rates between 2019 and 2022 that must be refinanced at 2025–2026 rates 3–4 percentage points higher. Properties that were underwritten with 4.5% cap rates and 3% financing costs are facing refinancing into 6–7% rates at a time when valuations have compressed. Many of these refinancings are not mathematically viable at current rents and require either equity infusions, lender modifications, or asset sales at distressed valuations.
The Federal Reserve began cutting rates in September 2024, bringing the federal funds rate from 5.25–5.50% to approximately 4.25–4.50% by early 2025. This rate cut cycle — slower and shallower than the market anticipated during the height of the 2023 rate panic — has begun to stabilize real estate valuations. The 10-year Treasury has settled into a 4.0–4.5% range that, while still elevated versus the 2020–2021 era, is below the 5%+ levels that caused the most acute distress.
CBRE and JLL's 2025 market outlooks suggest that multifamily and industrial transaction volume is recovering, with pricing stabilizing at levels approximately 15–25% below 2022 peaks. The bid-ask spread between buyers (expecting further declines) and sellers (unwilling to accept distressed pricing) is gradually closing as sellers accept the new reality and buyers return to the market. The new cap rate normal for institutional multifamily appears to be 5.0–5.5% — roughly double the 2021 lows — and investors who can acquire assets at these levels with current rents have far more favorable risk/return profiles than the 2021 vintage at 3.5–4% caps.
The CRE market of 2026 presents opportunities that didn't exist in the frothy 2021 environment. For multifamily, the new cap rate equilibrium of 5.0–5.5% on acquisitions that can be financed at 6.0–6.5% debt still requires careful underwriting — but is substantially more attractive than the 2021 negative leverage environment. Distressed office conversions to residential or life science use are generating activity in markets like New York, Boston, and Washington D.C. where the office-to-residential conversion economics are improving. Industrial remains the most fundamentally supported property type — Prologis and other logistics REITs have maintained occupancy above 95% — and benefits from the same e-commerce and onshoring demand drivers that were identified as structural tailwinds in 2022.
The most important lesson of the 2022–2026 cycle for CRE investors is not that rates matter — we always knew that. It is that structural demand destruction in office has made interest rate analysis insufficient for property type selection. A sophisticated CRE underwriting framework in 2026 must model work-from-home permanence alongside rate scenarios, must stress-test refinancing risk from the maturity wall, and must differentiate between Sun Belt multifamily markets that have absorbed new supply and those that are still working through it. The returns are there — but the analytical sophistication required to find them has increased substantially since 2022's simpler interest-rate-driven framework.