The Impact of Economic Cycles on Commercial Real Estate Lending and Sales
How interest rates, credit conditions and the property cycle move values, loan sizes and buyer demand, and what owners should check before a sale or refinance.
Updated & fact-checked Figures are linked to their sources at the end of the article.
Commercial property values and the money available to buy or refinance them rise and fall with the wider economy. When interest rates are low and lenders are confident, loans are larger, buyers pay more for each dollar of income, and sales come easily. When rates rise and lenders pull back, the same building can be worth less and support a smaller loan, even if its rent has not changed.
This article explains how that happens and what it means for timing. It is written for owners of hotels, apartment buildings, shopping centres and mixed-use property who are deciding whether to sell, refinance or wait.
How the cycle reaches a building
Three things link the economy to a property’s value and financing.
- Net operating income. Rent, occupancy and room rates follow employment, population growth and spending. Hotels feel this first, because they reprice every night; apartments and long-leased retail adjust more slowly.
- Capitalization rates. Buyers value income property by dividing net operating income by a capitalization (cap) rate. Cap rates tend to rise when borrowing costs and bond yields rise, because buyers want a higher return than they could get from safer assets. A higher cap rate means a lower value for the same income.
- Credit. Lenders size loans on value (loan-to-value) and on income (debt-service coverage). When rates rise, the same income covers a smaller loan, and when lenders become cautious they also lower the ratios they will accept.
The arithmetic is unforgiving. A small move in the cap rate changes the value, and the value sets the loan.
| Cap rate | Value at $1,000,000 net operating income | Loan at 65% loan-to-value | Shortfall against an existing $12,000,000 loan |
|---|---|---|---|
| 5.0% | $20,000,000 | $13,000,000 | None |
| 6.0% | $16,666,667 | $10,833,333 | $1,166,667 |
| 7.0% | $14,285,714 | $9,285,714 | $2,714,286 |
In the example, nothing about the building changes. Its income is the same in every row. Yet an owner who borrowed $12 million when cap rates were 5% would need to bring more than $1 million of new equity to refinance at a 6% cap rate. That gap is how most owners experience a downturn.
What the last cycle looked like
The years since 2020 show the full sequence. The Bank of Canada cut its policy rate to 0.25% in March 2020, held it there for two years, then raised it ten times between March 2022 and July 2023 to 5.00%. It began cutting in June 2024 and has held at 2.25% since October 2025.[1]
Bank of Canada policy rate and 5-year Government of Canada bond yield
- Policy rate
- 5-year bond
Show the data as a table
| Quarter | Policy rate | 5-year bond |
|---|---|---|
| Q4 2019 | 1.75% | 1.68% |
| Q1 2020 | 0.25% | 0.60% |
| Q2 2020 | 0.25% | 0.36% |
| Q3 2020 | 0.25% | 0.36% |
| Q4 2020 | 0.25% | 0.39% |
| Q1 2021 | 0.25% | 0.99% |
| Q2 2021 | 0.25% | 0.97% |
| Q3 2021 | 0.25% | 1.11% |
| Q4 2021 | 0.25% | 1.25% |
| Q1 2022 | 0.50% | 2.39% |
| Q2 2022 | 1.50% | 3.10% |
| Q3 2022 | 3.25% | 3.32% |
| Q4 2022 | 4.25% | 3.41% |
| Q1 2023 | 4.50% | 3.02% |
| Q2 2023 | 4.75% | 3.68% |
| Q3 2023 | 5.00% | 4.25% |
| Q4 2023 | 5.00% | 3.17% |
| Q1 2024 | 5.00% | 3.51% |
| Q2 2024 | 4.75% | 3.51% |
| Q3 2024 | 4.25% | 2.73% |
| Q4 2024 | 3.25% | 2.96% |
| Q1 2025 | 2.75% | 2.61% |
| Q2 2025 | 2.75% | 2.83% |
| Q3 2025 | 2.50% | 2.74% |
| Q4 2025 | 2.25% | 2.96% |
| Q1 2026 | 2.25% | 3.09% |
| Q2 2026 | 2.25% | 3.01% |
| Q3 2026 | 2.25% | 3.69% |
The chart carries the most useful lesson for anyone timing a refinance: a central bank cut does not guarantee cheaper term debt. Fixed-rate commercial mortgages are usually priced as a spread over a government bond of similar term, and the 5-year Government of Canada yield was 3.69% at the end of September 2026, against 2.25% for the policy rate.[2]
In the United States, where better public data exist on property prices, the U.S. Federal Reserve reported that inflation-adjusted commercial real estate prices fell significantly between mid-2022 and early 2024 and have since shown signs of stabilizing.[3] Office was the weakest sector: in late 2023 the Fed pointed to rising vacancy and falling rent growth for downtown offices.[4]
How lenders behave through the cycle
Lending conditions move with the cycle, and usually a little behind it. In the Fed’s survey of senior loan officers, U.S. banks tightened standards on new commercial real estate loans steadily from 2022 through 2024 and eased them over the second half of 2025.[3] In the July 2026 survey, banks generally reported easier standards and broadly unchanged demand for commercial real estate loans, although many still described their standards for construction and land development loans as being at the tighter end of their range.[5]
In practice, a tightening phase shows up as lower loan-to-value limits, higher debt-service coverage requirements, more recourse to the owner, larger reserves and slower credit decisions. Construction and land development loans are typically the first to tighten and the last to ease, as the July 2026 survey shows. Easing reverses those terms, often before prices recover, which is why sales activity tends to pick up once credit loosens.
The refinancing wall
Commercial mortgages commonly have terms of five or ten years, so loans written at low rates in 2019–2021 come due at today’s rates. The Mortgage Bankers Association’s survey of U.S. lenders shows the scale.
U.S. commercial and multifamily mortgages scheduled to mature in 2026
The U.S. Federal Reserve has warned that if borrowers who need to refinance cannot do so, forced sales could put downward pressure on prices.[3] For buyers, that is where distressed opportunities come from. For owners, it is the reason to look at a maturity date two or three years ahead, not six months.
The same pressure applies in Canada, but there is no comparable public maturity survey, so treat the U.S. figures as an indication of the problem, not of its Canadian size.
Property types run on different clocks
Not every asset moves at the same time. Hotels reprice their rooms every night, so their income reacts fastest in both directions, while apartments and long-leased retail adjust as leases turn over. Offices have been the weakest U.S. sector in this cycle, and loan maturities are bunched very differently by property type, as the hotel and multifamily figures above show.[4] Industrial buildings, data centres, life-science labs, seniors’ housing, co-working space and retail each have drivers of their own, from e-commerce to health-care demand, so a national “cycle” is only a starting point. Check the evidence for your property type and city before reading too much into national headlines.
Deciding when to sell or refinance
Nobody times the top or bottom reliably, and this is general information rather than advice on any property. What owners can do is make the decision on facts they control.
Questions to answer before you sell, refinance or wait
When does your debt mature, and what are the prepayment terms?
A maturity in the next 24 to 36 months, or a large prepayment penalty, often decides the timing for you.
What would the building appraise at today?
Use current cap rates for your property type and market, not the rate at which you bought. Ask a broker or appraiser for recent comparable sales.
How large a loan would today’s income support?
Run the lender’s debt-service coverage test at current rates. If the answer is less than your existing loan, plan for the equity gap now.
Is income rising or falling?
Selling on trailing income that is about to improve leaves money on the table; refinancing on income that is about to fall can leave you short.
Who are the buyers, and can they borrow?
When credit is tight, buyers who need high leverage drop out. Cash buyers and institutions remain, and they price risk harder.
What does waiting cost?
Count deferred capital spending, reserves, rate risk on floating debt and your own time, not only the hoped-for price.
Sources
- Policy interest rate — Bank of Canada. Checked 2026-10-12.
- Valet API: Target for the overnight rate (V39079) and Benchmark bond yield, 5-year (BD.CDN.5YR.DQ.YLD) — Bank of Canada. Checked 2026-10-12.
- Financial Stability Report: Asset Valuations — Board of Governors of the Federal Reserve System, May 2026. Checked 2026-10-12.
- Financial Stability Report: Asset Valuations — Board of Governors of the Federal Reserve System, October 2023. Checked 2026-10-12.
- The July 2026 Senior Loan Officer Opinion Survey on Bank Lending Practices — Board of Governors of the Federal Reserve System, July 2026. Checked 2026-10-12.
- 17 Percent of Commercial and Multifamily Mortgage Balances to Mature in 2026 — Mortgage Bankers Association, February 9, 2026. Checked 2026-10-12.
