Interest rates and the lending market for commercial real estate

By Steen Watson, CEO, Chestnut Funds

Q4 2024 Chestnut Funds manages real estate investment funds that invest in distinct strategies but with a common denominator of investing in middle market real estate alongside operating partners. Chestnut Funds was founded in 2012 after the partners’ collective experience revealed market inefficiencies, that if addressed, could provide meaningful investment opportunities for investors. Now, with five multi-asset funds under management and fundraising for our third medical outpatient building (MOB) fund underway, we remain true to our founding investment thesis.

Challenges within the U.S. commercial real estate market have frequently been linked to issues in the financing markets. For example, during the Great Financial Crisis, difficulties in residential subprime lending extended into the commercial real estate lending market, which was similarly characterized by relaxed lending standards. More recently, the U.S. commercial real estate sector has encountered obstacles due to elevated interest rates stemming from the Federal Reserve's initiatives to curb inflation. These increased interest rates, along with stricter lending standards, have adversely affected commercial real estate values although property operating performance across many sectors remains strong. In this edition of Viewpoints, we examine the effects of recent changes in the financing market and challenges faced by borrowers and lenders because of value declines and higher rates. 

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