Monday Market Moves | Week of 25 August 2025

Welcome to Monday Market Moves, the weekly series from Essex Capital Markets briefing you on Chicago commercial real estate capital markets. We cover key trends in CRE debt, refinancing, and capital structures to help investors, borrowers, and lenders navigate today’s CRE financing Market.

This Week: Commercial Mortgage Brokers See Signs of Market Stability in 2025 CRE Outlook

In this week’s market update, we see encouraging signs of stability and momentum in commercial real estate, even as a few headwinds linger. As commercial mortgage brokers, we’re tracking these key developments with a realistic but optimistic outlook:

• Cap Rates Plateau: A new midyear survey suggests CRE cap rates may have peaked in early 2025, with indications of stabilization despite economic volatility.
• Interest Rate Relief Hinted: Fed Chair Jerome Powell signaled the potential for interest rate cuts, a hopeful sign for borrowers after years of tightening.
• Multifamily Momentum: Multifamily assets – especially smaller deals – are seeing robust activity and investor demand, pointing to resilience in this sector.

Cap Rates Plateau Amid Volatility

After two years of increases, there are early signs that the commercial real estate market is at a stabilization point on cap rates. CBRE’s H1 2025 U.S. Cap Rate Survey (with 200+ broker respondents) indicates cap rates may have leveled off in the first half of 2025. The 10-year Treasury yield swung from about 4.8% in January down to 4.0% in April, before settling near 4.24% by midyear. Yet, despite that interest rate rollercoaster, all-property cap rates dipped ~9 basis points to an average 6.84% over the same period. Even more telling, cap rates across major property types moved in unison – an unusual alignment that suggests we may indeed be past the peak and entering a phase of cap rate compression, or, at least, cap rate stabilization.

Investor sentiment has shifted notably toward stability. In the previous survey, many expected further cap rate increases; now a majority expect no further movement across most sectors. For example, roughly 67%–74% of respondents across CBD office, suburban office, retail, and suburban multifamily predict flat cap rates ahead, rather than continued rises. Even industrial (64.5%) and hotel (50%) participants mostly foresee stability over the next six months. This marked rise in “no change” expectations represents a pause in the rising cap rate narrative that dominated recent years. In practice, it means buyers and sellers might finally share a more common view on pricing, which could help deal-making going forward.

That’s not to say all challenges have vanished. The survey noted that while median cap rates held steady, the spread between low and high estimates widened for riskier assets – especially Class B and C properties. These secondary assets are still under upward yield pressure as investors demand higher risk premiums for non-core deals. Additionally, geopolitical and policy risks are on the radar: trade tariffs and fiscal uncertainty led 57% of respondents to trim their 2025 deal volume forecasts slightly, and another 16% to cut forecasts significantly. Clearly, external factors like U.S. trade policy frictions are causing some caution in underwriting and transaction timing. Only a scant 3% of those surveyed felt more optimistic about deal flow in light of these issues.

The takeaway: The market appears done chasing higher cap rates, and that in itself is positive news. We’re likely past the peak of cap rate expansion. While it’s not “smooth sailing” just yet, this plateau signals a more stable foundation: core segments are stabilizing and investors are adapting to the new normal. A bifurcated market remains – prime assets vs. others – and macro headwinds (like tariffs and interest rate uncertainty) could still temper transaction volumes. However, the cessation of cap rate increases should boost confidence. With pricing finding equilibrium, buyers and lenders can move forward with more clarity. In short, we’re cautiously optimistic that stabilized yields will open the door for more deals in the coming quarters, as long as we navigate the remaining headwinds wisely.

Fed Hints at Future Rate Cuts – Relief on the Horizon?

Federal Reserve Chairman Jerome Powell indicated that shifting economic risks might warrant a policy adjustment – a positive signal for interest rates.

In a closely watched speech at Jackson Hole last week, Fed Chair Jerome Powell struck a more dovish tone, hinting that the Federal Reserve could cut interest rates sooner than later if economic conditions warrant. Powell noted that the Fed’s benchmark rate (now 4.50%) is already 100 basis points lower than a year ago, allowing policymakers to “proceed carefully” going forward. Crucially, he acknowledged that with policy in restrictive territory, the balance of risks has been shifting – and “may warrant adjusting our policy stance” in the near future. In Fed-speak, that’s a strong signal that rate cuts are on the table if growth or inflation metrics soften further.

This would be a welcome development for commercial real estate. Remember that in 2022–2023 the Fed executed an unprecedented 11 rate hikes in 12 meetings, which drove borrowing costs sharply higher and squeezed floating-rate loans in the CRE sector. Those rapid hikes pushed the Fed funds rate from near-zero to a peak over 5%, contributing to higher debt service burdens and some distress for property owners with variable-rate debt. By late 2024, the Fed pivoted to easing (with a half-point cut followed by two quarter-point cuts) and then paused in 2025. Powell’s latest remarks suggest that the next move could finally be down again – essentially affirming that inflation is tamed enough to ease off the brakes.

For CRE borrowers and investors, even the hint of lower rates is reason for optimism. Falling interest rates would reduce the cost of capital, making it easier to refinance loans and pencil out new acquisitions or developments. Lower Treasury yields also generally put downward pressure on cap rates (or upward pressure on asset values), which could further support property prices. It’s no surprise then that stock markets surged on Aug. 22 after Powell’s speech, with the S&P 500 jumping over 1.5% that day as investors anticipated a gentler rate environment ahead. Importantly, Powell emphasized that any decisions will remain data-driven and independent of political pressure, focusing solely on the economic outlook and risks. The Fed’s cautious approach means they won’t cut rates irresponsibly – but the door is open for relief if conditions allow.
What this means for us: If the Fed enacts a rate cut as soon as late September or later this year, it could be a significant boost for deal activity. Many prospective buyers have been sitting on the sidelines due to high financing costs; a modest decrease in interest rates could pull some of that demand back into the market. Similarly, owners facing loan maturities might find refinancing more feasible with lower rates, reducing the risk of distress sales. In short, a Fed pivot to easing would inject confidence and liquidity into the CRE markets – a trend we at Essex Capital would certainly welcome. We’re keeping a close eye on the Fed’s next meeting (Sept. 27) for any action. For now, just the possibility of rate relief is a positive signal that the financing environment for commercial real estate may improve in the months ahead.

Multifamily Shows Resilience and Growth

Amid these macro shifts, the multifamily sector continues to demonstrate why it’s often considered a stalwart of commercial real estate. Recent data on small-cap multifamily transactions (deals in the $5 million to $25 million range) show clear momentum building in 2025. According to Green Street, U.S. multifamily sales in this segment totaled $11.94 billion in the first half of 2025, a 9% increase over the same period in 2024. In fact, activity accelerated as the year went on: Q2 saw $6.26 billion in small multifamily sales, up 10% from Q1 and also 9% higher than Q2 of last year. This growth in volume – occurring despite higher interest rates and selective lending – suggests that investor demand for multifamily remains solid, especially at the more accessible, smaller deal size. The report even notes that momentum in the sector “appears to be strengthening,” a very encouraging sign heading into the latter half of the year.

Digging into the details, traditional apartment buildings accounted for the lion’s share of these transactions (about $10.4 billion). But interestingly, the fastest growth within multifamily came from alternative living segments: senior living facilities saw a 16% jump in sales year-over-year (to $1.19 billion), and student housing transactions rose about 6% (to $372 million). This indicates that investors are not only chasing conventional apartments but also diversifying into niche residential assets that have demographic tailwinds. Such broad-based demand speaks to multifamily’s reputation as a relatively defensive asset class – it tends to attract capital even when other property types (like office or retail) face headwinds.

Regional data shows that the recovery is widespread, with a few standout markets. Major metros like New York still saw the highest total small-cap multifamily volume (≈$1.12B in H1), albeit down slightly from last year. But cities such as Chicago and San Francisco experienced surging investment at this scale: Chicago’s half-year volume jumped to $382 million (from $227 million a year prior), and San Francisco saw a dramatic leap to $381 million (from $163 million). In percentage terms, some mid-sized markets led the nation – Milwaukee’s multifamily sales skyrocketed nearly 270%, with San Francisco (+134%), Chicago (+68%), Northern New Jersey (+65%), and Portland (+50%) not far behind. This kind of growth reflects investors targeting high-growth secondary markets and finding value in smaller deals. It’s worth noting that a few markets did lag (Dallas–Fort Worth and Denver, for instance, saw volumes fall around 40% year-over-year). But broadly, many more markets were up than down, and even those that declined remain active. The overall picture is of a resilient multifamily investment landscape that is adapting to local conditions – investors are cherry-picking opportunities where fundamentals (like job growth, in-migration, or university demand) support the rents and occupancy.

Big picture for multifamily: Despite higher financing costs compared to a few years ago, rental housing continues to attract capital. Strong rent collections and housing shortages in many cities mean apartments are still viewed as a relatively safe bet. The fact that deal volume is rising in the mid-market segment implies that buyers and lenders are finding ways to get deals done – whether through creative financing, JV equity, or simply adjusted pricing expectations. For us as debt intermediaries, it’s heartening to see this activity; it signals that liquidity is available and that well-located or well-positioned multifamily assets can secure the capital they need. We’re especially optimistic about niche sectors like senior housing, which is clearly on investors’ radar (owing to aging demographics driving demand). Overall, multifamily’s performance so far in 2025 suggests this sector will remain a bright spot in an otherwise uneven CRE market.

Closing Thoughts

As we enter the final stretch of the third quarter, it’s encouraging to observe a theme of stabilization with upside potential. Cap rates stabilizing at last year’s peak levels, combined with the prospect of lower interest rates, form a healthier backdrop for deal-making than we’ve seen in some time. Yes, we must remain mindful of economic and policy risks – trade tensions, selective credit availability, and market bifurcation are still part of the landscape. But from where we stand, the opportunities are beginning to outweigh the challenges.

In practical terms, a plateau in cap rates could bring buyers and sellers back to the table, narrowing the bid-ask gap that had widened when rates were in flux. Any easing by the Fed would further improve financing costs, bolstering cash flows and property valuations. And the ongoing strength in multifamily (and other favored sectors) demonstrates that capital is ready to deploy where the fundamentals are solid.

We remain realistic – cautious in underwriting and aware of potential bumps in the road – but firmly optimistic that the CRE market is poised for a pickup in activity. If current trends hold, the remainder of 2025 could see a gradual thawing of investment flows and credit availability. In our role as commercial mortgage brokers at Essex Capital Markets, we’re prepared to help clients capitalize on these positive developments. With stability returning and optimism growing, we believe now is the time to strategize and position for the opportunities ahead. Here’s to a productive week and a promising outlook for the market!

Sources:
CBRE – U.S. Cap Rate Survey H1 2025 via GlobeSt
Commercial Observer – Powell’s Jackson Hole remarks
GlobeSt – Small-Cap Multifamily Sales Trends, H1 2025

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