Navigating Interest Rate Volatility in 2026 CRE Deals
As the Federal Reserve signals rate cuts with inflation finally appearing to stabilize, CRE deals are projected to increase, but uncertainty is still high which could lead to high risk for investors who don’t prepare. While we are often able to get a sense of which direction rates are trending, it is clear that no one knows exactly what will happen in any given Fed meeting. This uncertainty causes some investors to hold off on acquisitions and miss valuable opportunities. It can also lead to miscalculating projected returns, which complicates timelines for reaching partnership hurdles. Advanced financial modeling can help mitigate risks and take advantage of opportunities through sensitivity analyses, scenario planning, and a better understanding of how different debt structures affect returns.
Some factors to consider going into 2026 are what the Federal Reserve is projecting, the strength of the current economy, and the supply and demand for different asset types. A December press release by the Board of Governors of the Federal Reserve System cites elevated uncertainty about the economic outlook but affirms their recent decision to lower the target range for the federal funds rate to 3.5%-3.75%. They also mention that inflation is still slightly elevated, however this should continue to decrease or remain relatively low as long as economic stability persists.
Employment is projected to grow through 2026 and while some industries are being disrupted by new technologies, increased investment in others is anticipated to outweigh this disruption and continue to expand the economy. This indicates a reduced risk of inflation and reaffirms the Fed’s projection that rates should not increase in the coming year.
The demand for different asset types in CRE has changed dramatically over the past 5 years but now shows some clear signs of what kinds of real estate are needed and what needs to be repurposed. The demand for office space has rebounded in 2025 and even retail centers, which were in decline prior to 2020 have recently seen low vacancies due to limited new supply that has come online. I’ve personally seen increased interest in industrial properties and lately more in specific industries like oil and gas. Multifamily has remained strong depending on the submarket. It remains important to be cautious in monitoring the construction pipeline and new household formation in order to avoid oversupply in areas with increased growth. This has led to continued lower rates available on multifamily and industrial deals, with financing terms for office still presenting challenges.
Some practical strategies to mitigate risk and be ready to move quickly when opportunities arise include understanding and being able to rapidly model different available debt structures. I recently worked with a developer who was constructing a build-to-rent townhome community that was funded by tax-exempt bonds. While this structure is not common, it is one method of securing low rates and helping to better understand projected returns. Affordable components, LIHTC programs, and utilizing opportunity zones can offer other potential financing advantages or reduce expenses in an effort to alleviate risk.
Ensuring that financial models are able to incorporate a diverse range of debt types and reassessing all of the programs available in order to deliver the highest returns possible, puts investors at an advantage when making investment decisions. Understanding that a certain degree of uncertainty and volatility is inevitable, having strategies in place beforehand improves the likelihood of maximizing returns.
By leveraging robust financial modeling and incorporating sensitivity tables to instantly assess how a 50 or 100 basis point difference in rate affects IRR and Equity Multiple, investors can make superior acquisition decisions and secure better returns amid uncertainty in the market.