What do tariffs mean for commercial real estate and CRE debt?

Benefit Street Partners (BSP) has maintained a cautious outlook on interest rates, suggesting they will remain elevated longer than anticipated. BSP advises the commercial real estate (CRE) market to be wary of wishing for significantly lower interest rates, as such a scenario could coincide with broader economic distress, including a potential recession or geopolitical events. Over the past year, the stock market has experienced a correction due to overvaluation, exacerbated by tariffs and trade tensions, though BSP views this correction as a necessary adjustment rather than a cause for alarm.

The multifamily sector within CRE is poised to benefit from potential declines in interest rates, which could occur as investors seek safer assets during periods of volatility. Lower interest rates serve as a tailwind for CRE valuations, and tariffs may inadvertently lead to such an environment. Additionally, tariffs are expected to increase replacement costs for assets, enhancing the value of existing properties by limiting new supply.

Commercial real estate, particularly the multifamily sector, acts as a hedge against inflation due to its ability to adjust rents frequently, leading to rent growth and increased property valuations over time. The multifamily sector also enjoys ample liquidity, supported by government-sponsored agencies like Fannie Mae and Freddie Mac, which continue to provide credit even in distressed economic conditions.

BSP has strong conviction in CRE debt, viewing the current environment as one of the best times since the Global Financial Crisis to invest in this asset class. The firm believes that the potential for lower interest rates and higher replacement costs due to tariffs will positively impact the CRE sector. Historically, CRE markets have shown an inverse correlation with the stock market, and BSP expects increased demand for CRE debt investments as investors seek stability in uncertain times.