CBRE Delays Cap Rate Compression Forecast to 2027

Rising Rates Shift Return Expectations

CBRE has revised its mid-year US commercial real estate outlook, extending its timeline for cap rate compression to 2027, according to Globe St. Kristen Smithberg cited the company forecast. CBRE initially expected modest cap rate declines for office and retail properties during 2026. However, persistently higher borrowing costs have made owners’ targeted returns harder to achieve.

The shift changes expectations for value appreciation across asset classes. Instead of relying on cap rate-driven growth, investors must prioritize property fundamentals and operating income. This approach reflects a broader trend as interest rates remain elevated longer than many expected. According to CBRE, performance will increasingly depend on income growth rather than valuation gains.

The Details

CBRE’s 2026 US investment forecast remains optimistic about transaction volume. The firm projects overall deal volume will increase 16% annually. Multifamily sales could rise 20%, while retail volume could climb 17%. CBRE expects office and industrial investment volume to increase 16% each.

Senior economist Matt Mowell said property value growth from cap rate compression will trail CBRE’s early 2026 expectations. Instead, improving vacancy trends could shift more attention toward NOI growth. COO Kevin Moosbrugger identified financing costs, rather than demand, as the market’s primary challenge. Buyer interest and confidentiality agreements remain strong compared with last year. Transaction volumes and CMBS activity also recorded a solid first half. Moosbrugger described the summer slowdown in deal launches as seasonal, not evidence of declining property values.

Demand Remains, But Debt Costs Drag

CBRE’s leadership emphasized that investor appetite remains sturdy across the market. Signed confidentiality agreements and lending activity indicate transaction processes accelerated through mid-2026. CBRE described the early summer slowdown in new deals as seasonal rather than structural.

Higher debt costs remain the larger challenge for investors. Many borrowers now favor debt indexed to short-term benchmarks like SOFR instead of long-term Treasurys. This strategy allows investors to adapt deal structures as financing conditions change. Property values already adjusted downward during previous years. Therefore, investors must generate more returns through NOI growth and less through rapid valuation gains or cap rate compression.

Why It Matters

CBRE’s revised outlook signals a structural shift for US CRE investors. Many investors relied heavily on cap rate compression during the previous cycle. However, elevated interest rates have changed that return equation. Rental growth, stronger occupancy, and disciplined property management now play larger roles in generating returns.

Multiyear cap rate stability also increases pressure on asset managers to improve NOI. That pressure is especially relevant as rising office expenses squeeze NOI and influence asset valuations. Meanwhile, vacancy rates have started stabilizing or moving closer to historical averages, according to CBRE’s mid-year commentary. These improvements could support income growth and make effective asset management increasingly valuable.

Geopolitical risks, particularly threats to global energy supplies and inflation, remain significant wild cards. So far, US-Iran tensions have not meaningfully reduced deal flow. CBRE expects manageable volatility unless a major market shock disrupts conditions. A Strait of Hormuz disruption could create such a shock.

If energy pressures ease, investment activity could outperform current forecasts. However, borrowing costs must decline before investors can expect meaningful support from cap rate compression. Until then, operators will need to prioritize property fundamentals, income growth, and efficient asset management.

What’s Next

Market participants should expect relatively flat cap rates through December. CBRE expects incremental compression only after benchmark interest rates begin declining, potentially during 2027. Most new transactions will require tighter underwriting and greater emphasis on income-oriented strategies.

Energy markets and Federal Reserve policy remain major variables for second-half performance. Both could push investment activity above or below current forecasts. Until capital costs decline, dealmakers must maximize returns through strategic tenanting and operating efficiency. Near-term upside will depend primarily on NOI growth rather than asset price appreciation.