Economic outlooks deteriorated sharply in the commercial real estate sector during the third quarter, according to the latest quarterly survey by the CRE Finance Council (CREFC).

Concerns about interest rates and the trajectory of economic policy fueled the downshift in the trade group’s Board of Governors (BOG) Sentiment Index, which plummeted 17.5% from the second quarter to 83.3, its lowest reading in three years.

Roughly two-thirds of respondents expect market conditions to worsen over the next year, compared to just one-quarter who thought so during the previous quarter.

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As the sector adjusts to a Federal Reserve rate-hiking cycle and surging government bond yields that have pushed rates on 5-year, 10-year and 30-year U.S. Treasurys to 5% or higher, the share of respondents who now expect sector liquidity to contract over the next 12 months rose from 5% to 24%.

“Our members’ concerns now extend past the next Fed decision to inflation, fiscal deficits and the outlook for long-term borrowing costs,” commented Raj Aidasani, managing director of the CREFC, in a press release announcing the results.

The quarterly sentiment survey poses nine questions to the 40 members of the CREFC’s governing board, comprised of senior executives from “every sector of the commercial real estate lending and mortgage-related debt investing markets,” the trade group says.

Concerning the impact of “federal government legislative and regulatory actions” on commercial real estate financing firms, optimism faded in the third quarter as the share of respondents who expected a positive impact declined from 26% to 11%. Two-thirds of respondents now expect a neutral impact.

“How will mortgage rates and cap rates impact the performance of all CRE finance-related businesses over the next 12 months?” the survey also asked.

Expectations for negative impacts from those factors spiked to 92%, from 53% in the second quarter and 46% in the first quarter. Underscoring how stark the current reversal in outlooks appears, no respondents reported year-ahead expectations for negative impacts from mortgage rates or cap rates through the entire second half of 2025.

Higher rates particularly impact firms seeking to refinance existing loans into a higher rate environment that is expected to persist through the end of next year. Multifamily developments have about $757 billion in outstanding debt maturing by 2028, according to the Mortgage Bankers Association, while about $290 billion in office loans are set to mature by that time.

“This is the most negative our board has been in three years,” added Aidasani.

Accompanying that reversal, expectations for borrower demand turned net negative in the third quarter for the first time since the fourth quarter of 2022, when the Fed was hiking interest rates at a rapid pace.

Only one-quarter of respondents now expect commercial borrowing demand to expand over the next year, compared to about half in the second quarter. One-third expect borrowing demand to contract, compared to just 13% who believed so just three months ago.

Regarding the “fundamentals” of most CRE financing companies — such as occupancy rates, rents and net operating income — 30% now expect those indicators to worsen over the next 12 months, while only 22% expect them to improve. During the previous quarter, 37% expected stronger fundamentals in the year ahead, with only 11% reporting negative views.

“If that view proves right, weaker rents and cash flow would compound the strain on borrowers already facing higher rates and maturing loans,” cautioned Aidani.