Oct 5, 2026 · 26 min
Higher rates split commercial real estate into winners and losers
Talk Your Book: How Higher Rates Are Re-Shaping Commercial Real Estate
Refinancing pressure is exposing weak properties while creating selective opportunities for lenders with protection against falling values.
- 1Rising rates are squeezing refinancing, reducing transactions, and widening the gap between high-quality and obsolete commercial properties.
- 2Office remains difficult to underwrite, while multifamily and industrial offer selective opportunities as capital providers retreat.
- 3Real estate credit may offer better risk-adjusted returns than equity when valuations are uncertain and financing demand is rising.
Don't miss
Jerry Baglien makes the case that real estate credit can outperform equity by relying less on predicting valuations and more on lender protection.
The brief
Michael Batnick and Ben Carlson revisit failed predictions about offices and travel before speaking with Jerry Baglien of Benefit Street Partners about the new commercial real estate landscape.
Baglien says higher rates are freezing transactions and forcing refinancing at painful terms, but real estate credit can retain meaningful cushions before lenders absorb losses.
The sector split is stark: office is difficult to underwrite, multifamily still produces cash flow, and industrial benefits as banks and other capital providers pull back.
Sun Belt multifamily reveals the cost of exuberance, with newer properties holding up better than weaker assets after heavy construction and intensified competition.
The closing case favors credit over equity: higher base rates and financing demand matter more than making a precise call on uncertain property valuations.
What was said on this episode
34 statements · 16 positive · 13 negative · 5 mixed
Commercial real estate is currently in poor condition.
“Well, it is pretty dead.”
Listen at 1:12
Office commercial real estate experienced a major value decline.
“No, but commercial real estate really did crash. It's office space.”
Listen at 1:31
Office space declined substantially in value.
“Well, it went down a lot in value.”
Listen at 1:37
New York City Class A office buildings are performing well.
“The Class A buildings in New York City, for example, are doing just fine.”
Listen at 1:43
Older office buildings will not recover.
“It is dead, never coming back.”
Listen at 1:53
Higher rates will reduce commercial real estate transaction volume.
“It's going to slow down transaction volume for sure.”
Listen at 3:42
Higher rates will make commercial real estate refinancing more difficult.
“It's going to make refis trickier than they were”
Listen at 3:45
Higher rates will pressure real estate valuations.
“it's going to put pressure on valuation.”
Listen at 3:48
Investors should be cautious yet opportunistic in real estate.
“I think you should be cautious, but also very opportunistic.”
Listen at 4:07
Real estate credit can provide a 30–40% cushion before losses.
“Having a 30%. 40 percent cushion in front of you before you take losses feels a lot better”
Listen at 5:42
Benefit Street Partners is avoiding office real estate investments.
“Still staying away from office almost categorically.”
Listen at 7:50
Multifamily valuations are pressured, but cash flows remain.
“multifamily, where valuations are tough, but cash flows haven't disappeared.”
Listen at 8:20
Multifamily has stronger long-term fundamentals and safety than other commercial real estate.
“the long-term need and fundamentals there, I think you've got a little more safety than anywhere else in the commercial real estate space.”
Listen at 9:19
Interest rates are not guaranteed to return to prior low levels.
“Just because rates were low doesn't mean they're going to go back to being low.”
Listen at 10:18
Current higher interest rates reflect relatively healthy economic conditions.
“You've got higher rates for not terrible reasons.”
Listen at 10:23
Well-managed real estate can compound returns beyond comparable Treasury yields over a decade.
“a good asset, even if you buy it at the same yield as a treasury and you run it really, really well, there is an expertise in real estate that over a decade, you're going to compound some of those returns”
Listen at 11:51
Real estate currently offers improved inflation protection because rents can rise with inflation.
“it's a better investment now for inflation than it was before because rents should inflate with everything else”
Listen at 12:14
Real estate credit is preferable for short-term investing.
“short-term, I think I'm still heavily in favor of the credit approach here.”
Listen at 13:33
Large, diversified asset-management platforms will outperform smaller competitors.
“large and more diverse platforms will continue to win out.”
Listen at 14:03
Rising rates will reduce lending activity and competition.
“this run-up in rates will pull things back.”
Listen at 14:31
Multifamily construction is depressed now but will recover within several years.
“I think construction's fairly depressed right now. It'll snap back in a few years and we'll be in another cycle”
Listen at 15:28
More real estate foreclosures will reach the market within about a year.
“you're going to see more foreclosures hit the market here over the next year or so.”
Listen at 16:22
Newer Sunbelt multifamily assets preserved value better than older properties.
“on the nicer, newer assets, you didn't see the same depression in value on those that you saw on the stuff that's 30 years old in the Sunbelt.”
Listen at 17:06
Higher construction debt costs will reduce new construction.
“that's going to depress construction.”
Listen at 19:14
Real estate supply will cycle from oversupply to undersupply and renewed construction.
“you're going to be oversupplied, no one's going to build, and then you'll be undersupplied again and everyone will build again.”
Listen at 19:18
Industrial real estate is a major and rapidly growing portfolio allocation.
“it's been our second largest asset allocation the last couple of years. And probably the biggest growth part of our portfolio”
Listen at 19:47
Well-timed San Francisco office investments may have benefited from AI-related demand.
“if you bought right in San Francisco, you might have caught the upswing on some of the AI trade and played that correctly.”
Listen at 21:08
Investors should be highly selective when investing in office real estate.
“I think you have to be much more selective on office today”
Listen at 21:22
Hospitality real estate currently appears attractive.
“I think hospitality still generally looks good.”
Listen at 22:14
Hospitality faces no evident near-term major problems and remains attractive.
“you don't see any near-term storm clouds on the horizon. I still like that part of the market.”
Listen at 22:54
Higher inflation should increase rents and hotel average daily rates.
“if you've got a little more inflation, that should be growing your rents across assets and growing your ADR and your hotels.”
Listen at 23:40
Real estate equity is unattractive until cap rates adjust and negative leverage ends.
“I'm less optimistic on equity from just a mathematical perspective today until you get some cap rate adjustments and you don't have negative leverage.”
Listen at 24:55
Current conditions make real estate credit more attractive than equity.
“It makes me like credit all the more”
Listen at 25:03
Recent market developments have increased conviction in real estate credit.
“I have more conviction, not less today because of everything that's happened.”
Listen at 25:51
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.