For more than a year, investors have been waiting for the commercial real estate market to stabilize. Rising interest rates have driven up borrowing costs, cut into returns, and forced sellers to cling to outdated valuations.
A vast reserve of investor capital has been waiting for the right moment – often called “dry powder,” a term that originated with gunpowder, which needed to be kept dry to remain useful in battle. In this case, it means money kept ready until the right moment to strike. That buildup has defined the market since the Federal Reserve began raising interest rates and tightening credit conditions, creating a prolonged standoff between investors eager to buy and properties that no longer generate returns high enough to justify the price.
Now, there seem to be early signs of movement. While large institutional players remain wary, smaller and more flexible investors are beginning to test the waters. While large institutional players remain wary, smaller and more flexible investors are beginning to reenter the market. This includes privately funded buyers and family offices, i.e. firms that manage the investments of wealthy families, which are finding opportunities as banks and lenders grow more willing to meet the market.
Some capital is starting to move, but not enough to signal a broad rebound. Reagan Pratt, director of the Real Estate Center at DePaul University, says the picture remains uneven. “Plenty of dry powder remains on the sidelines,” he notes. “We’ve seen a modest increase in deal flow, but it’s idiosyncratic – capital is finding a few trees in the forest, but widescale harvesting isn’t happening.”
That hesitancy reflects a deeper issue: many investors who entered the field during the long stretch of low interest rates that followed the 2008 financial crisis are now learning to operate in a very different environment. “Cheap is not a strategy,” Pratt says. “With cap rates rising and leverage no longer working in their favor, managers have to show how they’ll create value rather than relying on appreciation.”
The result is a market in which both buyers and sellers are recalibrating. Buyers want higher yields to offset more expensive debt, while sellers remain anchored to pre-rate-hike prices. Pratt’s mid-year survey of real estate professionals found that most expect this gap to narrow only slightly in the near term, and that sellers, not buyers, will be the ones who will eventually need to adjust.
Despite the caution, some capital is flowing again. In New York, Sean Sedaghatpour of Elisheva Realty sees new activity from both domestic and foreign investors. “As liquidity from lenders opens up, more investors are entering the market,” he says. “Family offices and established private investors are the most active right now. Institutions are still being selective, but the smaller players are finding value where they can.”
That selective activity often focuses on assets for which sellers are motivated or financing can be structured at today’s rates. “Banks are more willing to meet the market,” Sedaghatpour adds, “so they can clear older loans and originate new ones at better terms.”
In Los Angeles, Jim Kruse of NAI Capital links investor sentiment to confidence, both financial and political. “Confidence is improving, but slowly,” he says. “Local legislation and taxes continue to make investors cautious. Most buyers we see are from family offices that know the market well and have cash on hand.”
Not everyone is ready to jump back in. Many investors are holding out for clearer signals that prices have reached sustainable levels and that higher borrowing costs have been fully absorbed into the market. Ken Jacobsmeyer of Marcus & Millichap says several large real estate investment trusts (REITs) are preparing to move once property values drop enough to make long-term returns more appealing. “One major REIT told me they’d buy twenty-five Starbucks properties in a day once yields reach about seven percent,” he says. “We’re just not there yet.”
For now, those buyers are keeping their powder dry and watching the gap between asking prices and achievable rents narrow bit by bit. Jacobsmeyer adds that the market is also dealing with a glut of private-equity-backed properties – particularly in sectors like quick-service restaurants and car washes – that expanded aggressively during the boom years. Many of those businesses are now struggling to cover rent and meet revenue projections, which has cooled enthusiasm for large portfolio purchases. Instead, investors are targeting smaller, single-asset deals that allow for more selective underwriting and better control of risk.
As traditional institutional funding slows, managers are looking elsewhere for capital that can move more nimbly. Reagan Pratt notes that many are turning to private sources such as family offices, registered investment advisers, and high-net-worth individuals. These investors often have longer time horizons and fewer approval layers, allowing them to act quickly when a property fits their goals.
“They can have different risk tolerances and return expectations,” Pratt explains, “so it’s critical to match the capital source to the strategy.” For fund managers struggling to meet distribution targets or raise new rounds, these private channels can bridge the gap while institutional investors remain cautious.
At the same time, some of that capital is flowing into alternative real estate sectors that promise steadier returns or less competition. Data centers appeal because of growing demand for cloud storage and artificial intelligence infrastructure. Small-bay industrial properties serve e-commerce and last-mile logistics, giving them durable tenant bases. Outdoor storage and specialized facilities, while less glamorous, offer reliable cash flow and lower maintenance costs.
Once considered niche, these segments now represent practical ways to achieve stability and scale in a market where traditional retail and office properties remain under pressure. For many investors, they also serve as a hedge – helping to smooth out volatility and balance risk across portfolios that have grown more exposed to economic swings and shifting demand.
For now, the market remains in transition. The capital is there, but it’s being deployed selectively and with a sharper focus on risk management. Reagan Pratt notes that investors are maintaining discipline despite the pressure to act: “The powder has been pretty disciplined,” he says. “I don’t see a broad capitulation from investors anytime soon.”
That restraint may prove constructive. Instead of waiting for a sudden rebound, investors are recalibrating their portfolios for a world in which returns depend more on fundamentals than financial engineering. The new cycle could reward those who balance opportunism with caution, channeling unspent capital into assets that provide steady income, hedge against volatility, and align with long-term economic shifts such as logistics growth and data infrastructure.
If the past decade was about chasing appreciation, the next may be about earning resilience – turning patience itself into a strategy for sustainable growth.
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