Inflation’s Current Impact on Multifamily
The data may keep interest rates high for some time, but property fundamentals are improving, writes Stephen A. Sobin.
As 2025 unfolds, commercial mortgage rates remain a key concern for real estate investors seeking financing. The last few years have seen a depressed real estate market due to higher inflation and interest rates.
Many investors have been sitting on the sidelines waiting for rates to come down. Unlike a few years ago, this past year most investors who didn’t have maturing debt were not considering elective refinances. Further, many investors with maturing debt negotiated extensions with their current lenders so that they wouldn’t have to refinance in a high-interest rate environment.
With inflation significantly declining from 9.1 percent (the highest in 41 years) in the second half of 2022 to about 3 percent by the end of 2024, the Federal Reserve shifted its monetary policy and began to cut rates. Between September and December of 2024, the central bank brought the federal funds rate down from 5.25-5.50 percent to 4.25-4.5 percent. On Dec. 18, Fed Chairman Powell indicated that more rate cuts are likely as the Federal Funds rate was expected to drop to about 3.90 percent at the end of 2025. However, many experts think that Powell’s optimism was not truly warranted. Since many key inflation metrics, such as the Producer Price Index, are still increasing, many market experts oppose the Fed’s rate cuts.
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This skepticism can be seen very clearly in the Treasury market. While investors were expecting Treasury rates to decline with the Fed’s rate cuts, the opposite occurred. Market uncertainty about long-term inflation has caused long-term rates to increase. With the first rate cut in September, the 10-year Treasury began to rapidly jump from a low of about 3.6 percent to 4.8 percent by Jan. 13, 2025. As the 10-year Treasury serves as the standard benchmark for commercial mortgages, real estate investors have seen rates increase steadily since the rate cuts began. The current political landscape is also contributing to a lot of market uncertainty as many investors have been concerned that Trump’s tariff proposals may drive up costs and cause a further increase in inflation.
Beyond the data
While many investors are still uncertain about the state of the commercial real estate market in 2025, there is reason for some cautious optimism. According to a recent forecast released by the Mortgage Brokers Association, total commercial and multifamily loan volume is expected to rise 16 percent from 2024, to an estimated total of about $503 billion. This growth is largely driven by approximately $957 billion in commercial mortgages maturing this year, offering significant refinancing opportunities. The MBA has further predicted that the total commercial real estate originations volume in 2026 will increase to about $709 billion.
According to a report from JPMorgan, experts are seeing a lot of positive signs in 2025 across various asset classes. Driven by e-commerce and logistics demands, the industrial and warehouse sector is expected to continue to outperform other sectors this year. Moody’s reported that the industrial vacancy at the end of 2024 remained steady at 6.8 percent, which was well below the pre-pandemic averages. Experts have even begun to see some progress in the office sector. After recording high levels for three straight quarters, Moody’s has reported that the office sector’s vacancy rate has dropped to 20 percent. However, it is important to note that the office vacancy factor varies greatly by market.
The New York City vacancy rate in Q3 2024, for example, sat at 13.3 percent while the vacancy rate in San Francisco was 22.1 percent. Grocery anchored retail properties are also performing well to begin the year. Similarly, high end retail properties continue to perform well as consumers are more likely to shop for luxury goods in person than online. Experts at Freddie Mac are expecting an increase in origination volume this year in the multifamily sector. The expected increase is due to a variety of factors, including an accumulation of multifamily transactions that have been delayed for the last couple of years due to the interest rate environment, loans that can no longer be extended, as well as property price and cap rate stabilization. In addition, the multifamily industry is set for about $450 billion in loan maturities this year which will need to be refinanced.
As we look ahead to the remainder of 2025, there is cautious optimism for the commercial real estate and commercial mortgage industries. While challenges such as shifting work patterns, economic uncertainty, and potential regulatory changes may continue to impact certain sectors, there are strong signs of resilience. The ongoing demand for logistics and industrial spaces, along with the steady recovery of multifamily housing, provides a foundation for growth. Additionally, with interest rates expected to stabilize and more businesses adapting to hybrid work models, the office market may find a new equilibrium. Overall, though uncertainties remain, the industry’s ability to adapt and innovate positions it for a steady, albeit measured, recovery in the coming years.
Stephen A. Sobin is president & founder of Select Commercial Funding LLC, a nationwide commercial mortgage brokerage company. He is a member of the Inter-Capital Group and the Commercial Finance Broker Network, both nationwide alliances of commercial mortgage professionals.
