Even as the Federal Reserve has cut interest rates by 75 basis points since September, long-term Treasury yields — which CRE valuations are benchmarked against — have ticked up. The election of President-elect Donald Trump to a second term last week drove the 10-year yield even higher, as the market priced in concerns about inflation, the federal deficit and the direction of economic growth.

The 10-year yield ended Thursday at 4.45% and the five-year closed at 4.34%, levels that before this week they hadn't touched since early July, putting downward pressure on real estate values.

The shift in the bond markets means an ongoing stalemate between borrowers and lenders over valuations will likely drag on for the near term, causing more strain for borrowers and leaving lenders with more bad debt.

Adam Mustafa, co-founder and CEO of advisory firm Invictus Group, said the "number-one thing" he's paying attention to is how longer-term Treasuries are impacting the yield curve. 

"There could be a lot of euphoria about the Trump presidency and deregulation, a more business-friendly environment, and that he's a real estate guy," Mustafa said. "But if the belly of the curve is rising … that's a challenge."

Still, in the long term, people in the commercial real estate industry are confident that there's no doomsday in the cards.

John Toohig, head of whole loan trading at Raymond James, said barring a major shock from the economy, he's "cautiously optimistic" about the industry.

In the last two years, banks carrying large concentrations of CRE loans have faced increased scrutiny from investors and regulators. Post-pandemic trends battered the office building sector, and the rapid rise of interest rates put pressure on borrowers. Many banks racked up large allowances for loan losses in preparation for defaults. 

Treasury yields had already been climbing for weeks, but they surged the day after the election, in line with the so-called "Trump bump" that drove a boost in stock prices.

Oxford Economics analysts increased their Treasury yield forecasts following the election, saying that they expected elevated levels in the short term before yields start to slide in 2025. The firm now projects a long-term 10-year yield of 3.95%.

Abby Rosenbaum, an associate director at Oxford Economics who does real estate forecasting, said the road ahead in the coming months is still a bit of an unknown.

"If yields are higher — and we do expect them to be higher — what is this going to do for transaction volumes? For refinancing? For the expectation from the real estate industry in the near term?" Rosenbaum said. "I would expect the recovery to continue to begin next year. It's just in terms of the magnitude of that recovery, that's where the question mark is."

Fed Chair Jerome Powell signaled on Thursday that he was in no rush to cut rates. But the real estate industry still is hopeful that rates will come down, and that some of the inevitable blows lenders take from bad debt will be "bruises, not heart attacks," Mustafa said.

Keith Horowitz, an analyst at Citigroup, wrote in a note the day after the election that he doesn't expect CRE credit conditions to weaken more, as long as five-year yields don't return to levels around 4.70%. Most banks have also built strong cushions for potential losses, he added.

Sector participants are optimistic that the next Trump administration will bring beneficial tax cuts and softer regulators, though the president-elect's proposals to implement higher tariffs and deport huge numbers of migrants would increase the cost of goods and labor for real estate.

When the Fed began shaving short-term rates in September, there was hope it would spark refinancing and origination activity in the CRE sector. But five- and 10-year Treasury yields have climbed, leaving lenders and borrowers at an impasse. While lenders want to lock in loans at higher rates before they decrease, borrowers hope to hold out for when money is less expensive, Raymond James' Toohig said.

"Finding deals that make sense for both the borrower and the lender is a bit of a tug of war today," Toohig said.

This dynamic left many lenders working with borrowers to postpone refinancing or defer payments — what some observers call "extend and pretend." A recent report from the Federal Reserve Bank of New York stated that banks "have extended the maturity of their distressed CRE loans and pretended that such credit provision was not as risky to avoid further depleting their capital."

Thomas Taylor, a senior manager of CRE research at Trepp, said that delinquency rates on big, securitized office transactions, which are largely held outside of the banking sector, have continued to rise.

But he isn't expecting a repeat of the financial crisis 15 years ago. He expects deal volume to perk back up, especially for market participants who didn't get slapped by interest rate whiplash.

"The main fault line is this bifurcation between folks who timed the market well, folks who are well capitalized, and those who are not," Taylor said. "There's going to be some bloodletting for those who are not. That goes for lenders, for borrowers, equity investors."

The period of pain shouldn't be fatal, Mustafa said, and there's a light at the end of the tunnel.

"That cleansing period has to happen, and it will be some pain for banks, but it's not 2008 pain," Mustafa said. "It won't be fun. But on the back end of it, if the environment can be maintained, and we have a steeper yield curve, that's actually a good environment for banks."