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Capital Markets Observations and the Impact of Tariffs Heading into Q2 2025
April 2025
Key Highlights
Recently, Talonvest participated in two notable commercial real estate conferences – the ULI Annual Insight Meeting and Connect Orange County – to gather perspective from a variety of industry stakeholders.
In light of recent tariff developments, the Talonvest team has also held discussions with a variety of capital providers, and feedback indicates that capital remains available with moderate impacts on pricing.
Some lenders are showing a willingness to compete for deals they believe to be backed by strong business plans and prime locations, while others have slowed down the pace of quotes to assess the market response to tariffs.
Valuation resets have given owners more strategic options as well as the ability to prepare in advance for engagement with lenders.
In recent weeks, the Talonvest team participated in two conferences – the ULI Annual Insights Meeting and Connect Orange County. As we settle into the second quarter of 2025, signals from these events point to a complex lending environment. In the midst of ongoing tariff developments, there is measured optimism among capital providers, but there is also a mixture of uncertainty hanging over the industry. Below, we share observations on market sentiment along with strategic considerations as asset owners move through the remainder of the year.
The CRE Market Faces a Mix of Positive Trends and Challenges
In the second quarter of 2025, commercial real estate owners are faced with a market dichotomy that has implications for financing and operations. On one hand, it appears that some regional markets have absorbed most of the valuation resets that have occurred since 2022. At an aggregate level, the commercial real estate industry is expected to experience less than 2% aggregate supply growth through 2028, according to data gathered at the ULI Annual Insights Meeting, and limited new supply is helping to stabilize asset prices. Additionally, debt capital remains available, especially for projects with positive, realistic business plans where the owner has demonstrated the ability to execute.
On the other hand, demand drivers remain inconsistent in some markets, and transaction volumes are still well below pre-pandemic norms. Industrial development continues to face headwinds, particularly in core markets like Southern California, where zoning restrictions and rising construction costs subdue starts. Secondary markets like Phoenix, Las Vegas, and Reno are faring somewhat better as developers enjoy lower barriers to entry.
Insurance costs, particularly in states with climate-related exposures or legal volatility, have become one of the primary considerations for deal feasibility. While the market is showing signs of stabilization on a national level, premiums remain elevated. The evolving tariff regime is shaping much of the current macroeconomic discussion. In the early stages, the implications for debt capital markets appear to be focused on spreads, rather than real estate market conditions. Lenders are still open to financing deals, signing term sheets, and locking rates. There have been few, if any, reports of aborted or delayed closings.
However, in light of the economic uncertainty brought on by the tariff regime, capital providers are beginning to discuss risk mitigation and the steps that could be taken should conditions become more challenging. Early indications suggest that some lenders are curtailing perceived risk by regrading previously quoted deals and underwriting new deals more conservatively, but this is not pervasive across capital providers.
In addition to tariffs, insurance costs, particularly in states with climate-related exposures or legal volatility, have become one of the primary considerations for deal feasibility. While the market is showing signs of stabilization on a national level, premiums remain elevated.
On the other hand, demand drivers remain inconsistent in some markets, and transaction volumes are still well below pre-pandemic norms. Industrial development continues to face headwinds, particularly in core markets like Southern California, where zoning restrictions and rising construction costs subdue starts. Secondary markets like Phoenix, Las Vegas, and Reno are faring somewhat better as developers enjoy lower barriers to entry.
Insurance costs, particularly in states with climate-related exposures or legal volatility, have become one of the primary considerations for deal feasibility. While the market is showing signs of stabilization on a national level, premiums remain elevated. The evolving tariff regime is shaping much of the current macroeconomic discussion. In the early stages, the implications for debt capital markets appear to be focused on spreads, rather than real estate market conditions. Lenders are still open to financing deals, signing term sheets, and locking rates. There have been few, if any, reports of aborted or delayed closings.
However, in light of the economic uncertainty brought on by the tariff regime, capital providers are beginning to discuss risk mitigation and the steps that could be taken should conditions become more challenging. Early indications suggest that some lenders are curtailing perceived risk by regrading previously quoted deals and underwriting new deals more conservatively, but this is not pervasive across capital providers.
In addition to tariffs, insurance costs, particularly in states with climate-related exposures or legal volatility, have become one of the primary considerations for deal feasibility. While the market is showing signs of stabilization on a national level, premiums remain elevated.
Thoughts on Where Debt Capital Markets Stand Now
Participants at the recent industry conferences attended by the Talonvest team acknowledged the potential for tariffs to impact capital markets, but many reiterated the notion that capital continues to be available. At the same time, variation in lending appetite persists across different types of capital providers. Large banks remain among the most conservative lenders in the industry, a position that has held true for the better part of two years. In some markets, regional and local banks are stepping in where money center banks have pulled back. Life companies and debt funds are active, and they continue to enjoy the ability to be selective by focusing on the most attractive lending opportunities.
Since the Trump administration introduced a tariff regime in early-April, spreads have expanded in some cases. Most notably, CMBS spreads have widened by 20-50 basis points since the beginning of the year depending on deal timing. Nonetheless, the securitization market continues to transact. In certain instances, life companies have also expanded spreads, and in limited cases, there have been reports of reductions in loan proceeds.
Putting tariff concerns aside, the good news for owners is that in recent months, competition among capital providers has ramped up for projects that have promising business plans and seasoned ownership groups. This has been fueled by lending appetite clustered in specific corners of the market. As a group, life companies have seen a 37% increase in market share according to data presented at Connect Orange County, and many life companies are benefiting from the recourse and deposits policies maintained by many banks.
Debt funds continue to be another driver of competition. This group is becoming increasingly reliant on repo and warehouse lines from banks to offer competitive terms. The good news for owners is that these lines are flowing more freely in 2025. Still, the bar is high as debt fund capital continues to be directed primarily at high-quality assets and well-known sponsors.
Since the Trump administration introduced a tariff regime in early-April, spreads have expanded in some cases. Most notably, CMBS spreads have widened by 20-50 basis points since the beginning of the year depending on deal timing. Nonetheless, the securitization market continues to transact. In certain instances, life companies have also expanded spreads, and in limited cases, there have been reports of reductions in loan proceeds.
Putting tariff concerns aside, the good news for owners is that in recent months, competition among capital providers has ramped up for projects that have promising business plans and seasoned ownership groups. This has been fueled by lending appetite clustered in specific corners of the market. As a group, life companies have seen a 37% increase in market share according to data presented at Connect Orange County, and many life companies are benefiting from the recourse and deposits policies maintained by many banks.
Debt funds continue to be another driver of competition. This group is becoming increasingly reliant on repo and warehouse lines from banks to offer competitive terms. The good news for owners is that these lines are flowing more freely in 2025. Still, the bar is high as debt fund capital continues to be directed primarily at high-quality assets and well-known sponsors.
How Owners Can Position Portfolios for the Remainder of 2025
2023 and early 2024 were marked by low transaction volume as seller expectations proved robust. This dynamic continues to subside, and asset values have adjusted in many markets as seller expectations become attuned to market conditions. Ownership groups are finding that they have a workable underwriting baseline for acquisitions, which represents an improvement from earlier periods when volatility in the debt capital markets and low transaction volume made price discovery difficult.
Strategically, some of the best positioned owners are those controlling unique, and in some cases irreplaceable, locations. Even if these assets are not currently stabilized, there is evidence that valuations are holding up well. In some markets, land scarcity and entitlement challenges are making existing assets harder to replicate, a dynamic that may improve long-term valuations for owners positioned in constrained markets.
On the leasing side, especially in the industrial sector, landlords who can offer shorter terms with built-in expansion or downsizing options are seeing more traction. Lease ups continue to be an issue for development projects in some markets. Owners with concerns about lease up timelines should consider whether there is risk to the business plan (i.e., shifting from construction to perm) that might necessitate the exploration of a bridge solution.
Strategically, some of the best positioned owners are those controlling unique, and in some cases irreplaceable, locations. Even if these assets are not currently stabilized, there is evidence that valuations are holding up well. In some markets, land scarcity and entitlement challenges are making existing assets harder to replicate, a dynamic that may improve long-term valuations for owners positioned in constrained markets.
On the leasing side, especially in the industrial sector, landlords who can offer shorter terms with built-in expansion or downsizing options are seeing more traction. Lease ups continue to be an issue for development projects in some markets. Owners with concerns about lease up timelines should consider whether there is risk to the business plan (i.e., shifting from construction to perm) that might necessitate the exploration of a bridge solution.
Final Thoughts
As we move into the second quarter of 2025, the commercial real estate lending environment has improved in many aspects from a year earlier. While tariffs have encouraged some lenders to examine risk tolerances, most are offering up quotes, deals are getting done, and sponsors are adjusting valuation expectations. Importantly, competition has increased among certain lender types to the benefit of owners. These storylines support the notion that rather than expecting a full recovery to pandemic era deal volumes and valuations, owners and other stakeholders are recalibrating and modifying strategy. Disciplined underwriting, solid lender relationships, and a focus on operational fundamentals will serve owners well in this environment.
Talonvest Capital specializes in structuring and negotiating comprehensive capital solutions for owners of industrial, self-storage, multifamily, office, and retail assets. We create tailored capital solutions for our clients by sourcing cutting-edge lending programs and advising on capital markets trends.
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