Commercial Real Estate Today: What Investors Should Know in a Reset Market
Commercial Real Estate Today: Insights From Our Conversation with KKR
Capstone recently welcomed Julia Butler, a Managing Director in KKR’s Real Estate group and CEO of KKR Real Estate Select Trust, for a wide-ranging discussion with our advisory team. Julia is experienced across real estate credit and equity, globally, and has invested in the asset class for more than two decades. Her conversation outlined what KKR is seeing in today’s real estate markets, how the landscape has evolved over the past several years, and which factors are currently shaping investment decisions.
This article summarizes key takeaways from that discussion and highlights why the current commercial real estate environment may be creating opportunities for long‑term investors. At the same time, the perspective presented here reflects Julia’s interpretation of market conditions, informed by her firm’s experiences and the influences she identifies in shaping investment decisions, offering one thoughtful view rather than a definitive industry consensus.
At a Glance
Commercial real estate has gone through a meaningful valuation reset as interest rates increased sharply across 2022 and 2023. While certain sectors such as office continue to face challenges, many areas—especially multifamily, industrial, and needs-based properties—are showing steady tenant demand. Lower valuations, moderating construction pipelines, and improving credit availability have led some investors to reevaluate private real estate as part of long-term portfolios.
Below, we break down what has happened in commercial real estate, what KKR is watching today, and how these trends may matter for long-term investors.
What’s Happened in Commercial Real Estate Since 2022
Commercial real estate has undergone a significant valuation reset in recent years. The primary driver has been the sharp increase in interest rates starting in 2022. Because real estate valuations are tied to discount rates and capitalization rates, higher interest rates tend to reduce present values—even when underlying property fundamentals remain healthy.
Unlike the Great Financial Crisis, this period was not driven by a collapse in demand or excessive leverage across most property types. In many areas of the market, tenant demand and rent growth have remained steady. But the math of higher rates has been a meaningful headwind for property prices.
Certain property types, such as commodity office buildings, have faced additional structural challenges. Other sectors—such as multifamily, industrial, and select needs-based areas—have generally shown more durability.
Why Today’s Environment May Be Creating Opportunities
While the last few years have been difficult for many real estate owners, the current backdrop includes several factors that firms like KKR are watching closely. None guarantee outcomes, but together they help explain why some investors view this as a potentially attractive environment for selective investment.
Assets Are Trading Below Replacement Cost
Replacement cost refers to what it would take to build a similar property today, including materials, labor, land, and regulatory requirements. Because construction costs rarely decline—labor shortages, elevated materials costs, and regulatory delays all contribute—replacement cost generally rises over time.
In periods of market stress, existing properties sometimes trade at notable discounts to replacement cost. Julia noted that there are now opportunities to purchase newer-vintage, well-located assets well below what it would cost to build them today. When assets are priced below replacement cost, new supply is less likely to come online, which may help support long-term fundamentals.
New Construction Has Pulled Back
A key dynamic in real estate is the pace of new development. When financing costs rise and construction becomes less economical, new projects often slow sharply. That is exactly what the market has seen over the past two years.
In areas like multifamily and industrial, developers have been less willing (or able) to break ground on new projects. As a result, supply pipelines are normalizing toward—or below—long-term averages. At the same time, leasing activity has generally remained steady. As supply and demand move back toward balance, rents may begin to reflect that stabilization.
Credit Markets Have Re-Opened
Real estate credit tends to move ahead of equity in market cycles. When uncertainty increases, financing becomes scarce. When stability improves, credit availability often returns first.
Julia noted that real estate credit markets are much more functional today than they were 12–18 months ago. Banks and insurance companies have re-entered the space at loan-to-value ratios that reflect the new environment. While borrowing costs remain higher than in the pre-2022 period, more predictable access to debt may support a healthier transaction market.
Many Segments Continue to Reflect Everyday Needs
A large share of commercial real estate is tied to needs-based demand:
Multifamily housing
Distribution and logistics facilities
Certain medical and senior living properties
Across these “essential use” sectors, tenant demand continues to be supported by demographic trends, labor market strength, and business activity. These areas have not been immune to the rate-driven valuation reset, but their underlying demand drivers remain intact.
What KKR Is Seeing Across Major Property Types
During our discussion, Julia shared observations from across KKR’s real estate portfolio. While every firm evaluates deals differently, several themes stood out.
Multifamily
Housing affordability remains a challenge nationwide, and many households are renting for longer. With mortgage rates elevated and down payments harder to accumulate, the average age of first-time homebuyers has continued to rise. This has helped support steady multifamily occupancy and rent trends in several markets.
Supply varies meaningfully by region. Some Sunbelt markets experienced heavy construction in recent years, while other high-barrier markets saw very little new supply. Over time, slower development may help reduce imbalances.
Industrial & Logistics
Industrial remains supported by multiple long-term trends, including e-commerce, supply chain modernization, and select areas of domestic manufacturing. Julia highlighted examples of tenants upgrading facilities to newer, more efficient properties—sometimes at meaningfully higher rents. These types of situations underscore the value of location, building quality, and access to transportation infrastructure.
Office
Office remains a complex and evolving story. While vacancy rates are high in certain commodity buildings, activity is gradually improving in specific markets. Firms looking to encourage in-person collaboration are gravitating toward buildings with stronger amenities, newer systems, and attractive locations. That said, office continues to require careful underwriting and remains an area of selective participation for many investors.
Senior Housing
Demographic demand is steadily increasing as the U.S. population ages. While the sector is operationally intensive, newer-vintage, well-managed properties have seen improving occupancy trends. Julia noted that this is an area where operational expertise matters and where certain markets may benefit from long-term supply/demand dynamics.
Why Some Investors Are Leaning Into Private Real Estate Today
The environment today—characterized by a valuation reset, reduced construction pipelines, more functional credit markets, and resilient tenant demand—has led to potential opportunities across private real estate.
This does not imply that conditions are risk-free or that outcomes are predictable. Private real estate involves illiquidity, valuation uncertainty, and exposure to both economic and property-specific risks.
But taken together, the factors above help explain why experienced real estate investors are active in today’s market and why this period may warrant thoughtful evaluation by long-term investors.
How Capstone Helps Clients Navigate These Trends
At Capstone, we stay closely engaged with investment professionals across public and private markets to understand how conditions are evolving. Our conversation with Julia Butler is one example of the ongoing dialogues we pursue as part of our due diligence and research efforts.
When considering private real estate allocations, we focus on:
A client’s broader financial plan
Existing real estate investments
Liquidity needs
Tax considerations
Time horizon
The role that private assets in general may serve within a diversified portfolio
As the landscape continues to evolve, we remain focused on helping clients understand how private real estate may fit within the broader context of their financial plan. Our goal is to offer clear perspective, thoughtful analysis, and ongoing monitoring—so clients can make informed decisions about whether opportunities in this space align with their long-term objectives.
The commercial real estate landscape remains dynamic, and understanding these shifts can help investors assess whether private real estate has a role in their broader financial plan.
Frequently Asked Questions About Today’s Commercial Real Estate Market
1. What caused the recent downturn in commercial real estate values?
Commercial real estate values declined primarily because interest rates rose sharply starting in 2022. Higher rates increase borrowing costs and raise capitalization rates, which reduces property valuations even when tenant demand remains stable.
2. How is today’s commercial real estate environment different from 2008?
Unlike the Great Financial Crisis, today’s adjustment has not been driven by excess leverage or broad weakness in tenant demand. Most sectors have maintained healthy occupancy and rent levels, and the valuation reset has been largely rate-driven.
3. What does it mean when properties trade below replacement cost?
When a property’s market value falls below what it would cost to rebuild it today, new development becomes less economical. Over time, this can reduce supply pipelines and help support underlying fundamentals over time.
4. Which commercial real estate sectors have shown the most resilience?
Multifamily housing, industrial and logistics facilities, and certain medical and senior living properties have generally demonstrated steadier demand because they serve needs-based segments of the economy.
5. Why are some investors revisiting private real estate now?
A combination of lower valuations, moderating construction pipelines, and improved credit availability has created potential opportunities. These factors do not guarantee outcomes but help explain why some investors are selectively evaluating the space.
6. What risks should investors consider with private real estate?
Private real estate involves illiquidity, valuation uncertainty, sensitivity to economic conditions, and property-specific risks such as tenant turnover or operating expenses. These factors should be evaluated within a broader financial plan.
7. How does Capstone evaluate private real estate opportunities for clients?
We consider a client’s financial plan, liquidity needs, risk tolerance, tax considerations, and time horizon. We also maintain ongoing due diligence conversations with real estate professionals across the industry to understand changing market conditions.
8. Is commercial real estate recovering?
Conditions vary by market and property type. Some areas, such as industrial and select multifamily markets, are showing signs of stabilization, while other sectors—especially certain office buildings—are experiencing continued challenges.
9. How have credit conditions changed in commercial real estate?
Real estate credit markets have become more functional than they were 12–18 months ago. Banks and insurance companies have re-entered the market at loan-to-value ratios that reflect the new environment, which has supported transaction activity.
Disclosures:
References to KKR or other third-party firms are for informational purposes only and do not constitute an endorsement or recommendation of any organization, product, or service.
This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review by contacting us at capstonefinancialadvisors@capstone-advisors.com or (630) 241-0833.