Will This Give the Commercial Real Estate Market the Psychological Boost It’s Been Waiting For?
While commercial property values and borrowing costs are driven by macroeconomic fundamentals such as supply, demand, and inflation, psychology plays an equally powerful role in commercial real estate decision-making.
Buying, selling, or borrowing against commercial real estate rarely happens based on numbers alone. A decision is made only when the decision-maker feels emotionally confident that it’s the right move. That emotional buy-in is often the final catalyst, especially when committing to long-term ownership.
Why Psychology Matters in Commercial Real Estate Decisions
Through decades of experience, we’ve observed that real estate decisions combine both empirical analysis and emotional conviction. Buyers, sellers, and owner-users must all feel they are acting in their best interest.
That sense of conviction is particularly critical when it comes to:
- Long-term debt
- Occupancy cost control
- Capital commitment
- Irreversibility after closing
This emotional component shows up repeatedly in owner-user industrial real estate decision-making.
Mortgage Rates as a Psychological Trigger
One of the most influential psychological drivers in the lease vs. buy decision is mortgage interest rates. Controlling occupancy costs often motivates business owners to pursue ownership rather than leasing.
For much of the decade ending in 2022, borrowing costs were historically low. At one point, fully amortized SBA 504 loans fell to just 2.16%, fueling a massive surge in owner-user acquisitions. During that period:
- Industrial property values quadrupled
- Supply evaporated as owners held appreciating assets
- Many owners generated more wealth from real estate than from their businesses
This era reshaped expectations around industrial property ownership strategies.
What Changed: Inflation and the Rate Shock
Then came inflation and with it, aggressive interest rate hikes. Borrowing costs surged as the Fed raised the cost of capital to cool the economy.
Buyers retreated to the sidelines, expecting a price correction that largely never came. Sellers followed suit, content to hold properties with low-rate, long-term debt in place.
As a result:
- Transaction volume collapsed
- Pricing remained relatively stable
- Mortgage rates peaked in the low 7% range in late 2023
In short, nobody felt good about buying, and sellers felt no pressure to discount.
Why Today Feels Different
Fast forward to today, and conditions are improving.
Mortgage rates are down roughly 59 basis points since January, inventory quality has improved, and pricing has softened modestly. Most notably:
- SBA 504 second mortgage rates have dropped to ~5.9%
- Conventional first mortgages are pairing in the 5.5% range for qualified borrowers
These shifts align with what we’ve discussed regarding commercial mortgage rate trends and Treasury yields. Rates with a “5” in front of them appear to be restoring confidence. We are already seeing increased activity from owner-users, with fewer buyers waiting for dramatically lower rates.
The Role of Tax Incentives in Renewed Market Momentum
An equally important driver is the suite of tax incentives introduced under the One Big Beautiful Bill Act (OBBBA). These include:
- 100% bonus depreciation
- Expanded Section 179 expensing
- Enhanced benefits from cost segregation
These incentives are covered in detail in our discussion of bonus depreciation and cost segregation strategies. Together, these tools materially improve after-tax acquisition economics and have brought many sidelined buyers back into the market.
What This Means Going Forward
While uncertainty remains, we believe the market is entering the early stages of a psychological shift. As transaction activity increases:
- Vacancy rates may begin to decline
- Pricing could stabilize or firm
- Limited new construction may amplify demand
If mortgage rates remain in the high-5% range, another pricing spike in 2026 is not out of the question.
Thinking About Buying or Leasing While Rates Are Favorable? Let’s Talk.
If improving mortgage rates and new tax incentives are changing how you view your real estate strategy, now is the time to get informed and prepared to act.
👉 Talk to a Zehner Hill industrial real estate advisor