Commercial real estate finance executives have grown pessimistic about the direction of the economy and to some extent the industry, much more so than at the end of 2025, according to the first-quarter 2026 Board of Governors Sentiment Index survey results released by the CRE Finance Council. War has changed the outlook.
In the first quarter of 2026, the index fell 20.2 percent to 100.1 from 125.4 in the fourth quarter of 2025, rolling back gains accumulated over the prior three quarters and nearly returning to the survey’s fourth quarter of 2017 baseline of 100.0.
Responses gauging sentiment in all nine core questions trended pessimistic quarter-over-quarter, with the sharpest pullbacks coming in respondents’ views on rates, overall industry sentiment and the economic outlook.
The survey, which was conducted by the CRE Finance Council from April 7 to April 13, 2026, captured a sharp shift in sentiment driven by the onset of the Iran war and its impact on interest rates, transaction pace and the macroeconomic outlook.
Besides the nine core questions the survey asks various additional questions, but those are not factored into the BOG Index. Ninety-one percent of the organization’s BOG responded to the first quarter of 2026 survey.
War clouds the outlook
Front and center is the impact of the Iran war on commercial real estate finance over the next six months. Only 7 percent believe it will have no meaningful lasting effect on commercial real estate markets.
A majority, 61 percent, said it would keep borrowing costs elevated by pushing out rate relief, while 20 percent said it would freeze transaction and investment activity as investors wait for clarity. Twelve percent expect it to weaken property-level fundamentals through slower economic growth.
As for refinancing risk, office-associated loans face the greatest risk, according to 56 percent of respondents, especially secondary and lower-quality office loans. Another serious refinance risk is posed by transitional assets that have not yet stabilized (32 percent), multifamily loans in supply-heavy markets (7 percent), and hotel loans with high leverage or weaker sponsorship (5 percent).
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In new construction, the survey points to continued discipline rather than an energetic rebound. Seventy percent expect selective development concentrated in the strongest sectors and markets, while 23 percent expect a modest slowdown, with most viable projects still moving forward. Almost none of the respondents (3 percent) expect a significant pullback.
Macroeconomic jitters
Economic sentiment reversed sharply for the quarter, with a majority of respondents (54 percent) now expecting the U.S. economy to perform worse over the next 12 months, up from just 14 percent in the fourth quarter of 2025. Only 12 percent expect improvement and 34 percent posit no change in the latest survey.
Confidence in federal legislative and regulatory action fell dramatically. Back in the fourth quarter of 2025, 60 percent of BOG respondents expected positive effects and only 6 percent expected adverse ones. In the first quarter of 2026, opinions are more mixed: Nearly half (49 percent) expect a neutral impact from federal legislative and regulatory actions, while 29 percent expect a positive impact and 22 percent expect a negative impact.
The interest rate question posted the sharpest pullback of any core question, according to CREFC. In the first quarter of 2026, only 7 percent expected rates to have a positive impact on commercial real estate finance businesses, while 46 percent are neutral and 46 percent negative. That is a marked contrast with the fourth quarter of 2025, when 69 percent reported a positive impact and no one reported a negative one.
Respondents still optimistic about CRE fundamentals
The respondents weren’t universally gloomy, however, especially when it comes to the industry itself, shaping the commercial real estate industry outlook. Forty-one percent of respondents still expect improving commercial real estate fundamentals over the next 12 months, 61 percent expect stronger investor demand for commercial real estate and multifamily assets, and 71 percent expect higher borrower demand for financing.
Those percentages suggest that the respondents believe that underlying market activity remains intact. That is the case despite the fact that confidence in the macro backdrop has deteriorated significantly.
“The most surprising element was how broad-based the decline was while core demand indicators still held up,” CRE Finance Council Managing Director, Research Raj Aidasani told Commercial Property Executive.
“Even after a 20.2 percent drop in the index, 71 percent of respondents still expect higher borrower financing demand and 61 percent still expect more investor demand,” Aidasani said. “That is a meaningful distinction between a market repricing risk and a market that is seizing up.”
What stood out this quarter was the speed and breadth of the reset, Aidasani added.
“Members had spent several quarters building conviction that the rate backdrop had turned supportive, and the recent geopolitical shock and renewed rate volatility reversed that quickly,” he said.
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