Stronger Property Income May Offset Higher CRE Debt Costs

GlobeSt reports in its analysis of higher CRE borrowing costs that stronger property income may soften the impact of more expensive debt. Cushman & Wakefield sees healthier leasing, rent growth and net operating income across property types. Those gains give well-leased assets a potential buffer, even as refinancing and acquisition math becomes more difficult.

Property Income Provides a Buffer

Cushman & Wakefield said CRE fundamentals are healthier than they were one or two years ago. Leasing activity has improved, rent growth has remained firmer and NOI gains have broadened. For owners, that matters because higher interest rates do not automatically mean weaker property cash flow.

Assets with improving occupancy or leases rolling to higher rents have more capacity to cover rising interest expense. By contrast, properties with weak leasing or stagnant income have less room to absorb debt costs. The operating side of the equation therefore becomes more important as financing remains expensive.

The Details

Financial markets expected the Federal Reserve’s latest 25-basis-point increase, which moved its target range to 3.75% to 4%, according to GlobeSt. Cushman & Wakefield expects commercial mortgage rates to rise above the roughly 6.5% level cited in recent lender surveys. The firm advised investors not to underwrite the rest of 2026 on the assumption that lower base rates will automatically reduce borrowing costs.

That outlook places the most pressure on highly leveraged owners and properties nearing maturity. Higher interest expense can reduce debt-service coverage and limit refinancing flexibility when property income has not kept pace. Acquisitions that require cap-rate compression to achieve returns also face a more difficult path.

Why It Matters

The underwriting focus is shifting toward current cash flow, leasing prospects and achievable NOI growth. That makes durable operating performance more valuable than a thesis built mainly on cheaper future debt or valuation expansion. A property with rising income can protect cash flow better than a comparable asset with flat operations.

The same rate environment is also constraining new construction, according to Cushman & Wakefield. Less development could strengthen the competitive position of newer, well-located buildings by limiting future supply. That dynamic may encourage tenants to secure desirable space earlier or for longer terms in markets where new projects are harder to finance.

Cushman & Wakefield also expects expensive financing to limit new construction. A smaller development pipeline can make newer, well-located assets scarcer, especially where tenants are already competing for high-quality space. That can reinforce income growth at existing properties even while higher borrowing costs pressure valuations.

Stable property income also supports the broader debt-capital recovery by giving lenders clearer cash flow to underwrite. Borrowers without that cushion remain more exposed to refinancing pressure.

What’s Next

Higher rates may also make leasing more attractive than acquiring or developing real estate. Cushman & Wakefield said occupiers could lean toward leases as ownership and ground-up construction become more expensive. At the same time, landlords facing refinancing pressure may offer favorable terms to retain creditworthy tenants and protect occupancy.

Occupiers may respond by securing desirable space sooner and for longer terms rather than waiting for future supply, according to Cushman & Wakefield. That behavior would support landlords with quality inventory in markets where financing constraints are already limiting new development.

The near-term split will depend on whether NOI growth can offset financing expense at the asset level. Owners with durable demand, rent-growth potential and manageable maturities have more flexibility. Highly leveraged assets with near-term refinancing needs and weaker income performance have much less room for error.

Landlords with refinancing pressure may also prioritize retention. Cushman & Wakefield said they could offer more favorable lease terms to creditworthy tenants when preserving occupancy and income helps protect debt coverage.