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Insights · Markets & Rates

Are we looking at 2008 again? Is a commercial real estate crash coming because of high rates?

Rates are rising again and office loans are going bad at a record pace. Here is what the numbers actually say about the risk of a crash, and what it means for owners and buyers in Arizona.

By Jon Willis, Founder & Designated Broker · · 7 min read

It is the question we hear most from property owners right now: is this 2008 all over again? The worry is understandable. Interest rates are moving the wrong way, office distress is at record levels and every headline seems to point to trouble. But the answer, based on the data, is more nuanced than "yes" or "no."

We started in this business in 1999 and worked through the 2008 crash and the long recovery after it. Here is how today compares.

Where rates stand today

  • The Fed is leaning tighter, not looser. The Federal Reserve raised its benchmark rate by a quarter point in September and held it at 3.75% to 4.00% on October 28. Two members reportedly wanted another increase, and markets are pricing in the chance of a hike in December.
  • Long-term rates are near 5%. The 10-year Treasury yield, which drives most commercial and home loan pricing, was trading just under 5% in late October.
  • Mortgage rates are above 7%. Freddie Mac's 30-year average was 7.32% in its October 22 survey.

For commercial real estate, the 10-year Treasury matters more than the Fed's short-term rate. When it sits near 5%, borrowing costs stay high, buyers demand higher returns and property values feel the pressure.

What made 2008 a crash

The 2008 crisis was not mainly caused by high interest rates. It was caused by bad loans and too much borrowing. Banks made home loans to people who could not repay them, packaged those loans into securities, and spread the risk across the entire financial system. When home prices fell, the whole system seized up at once. In Phoenix, home prices fell by more than half from their peak.

Commercial real estate was hit hard too, but it was dragged down by a credit crisis and a deep recession. Lending froze overnight, and owners who needed to refinance simply could not.

2008 was a credit crisis. Today is a rate problem. They hurt in different ways, and they do not end the same way.

How today is different

  • The pain is concentrated, not everywhere. Office loans are the problem. Trepp reports the CMBS office delinquency rate hit a record 12.0% in August, while industrial loans were just 1.14% delinquent. In 2008, nearly everything fell at once.
  • The overall numbers are elevated, not catastrophic. The overall CMBS delinquency rate was 7.85% in August. That is high, but still below the all-time peak of 10.34% set in 2012, during the aftermath of the last crisis.
  • The debt wall is real but shrinking. The Mortgage Bankers Association says $875 billion of commercial mortgages mature in 2026, 9% less than in 2025. Its own analysts say the market is "beginning to move past the peak of the maturity wave."
  • Lenders are still lending. Unlike 2008, credit has not frozen. It is more expensive and more selective, but deals are still getting financed.

The real risk: refinancing, not a collapse

The biggest danger today is not a sudden crash. It is a slow squeeze on owners who borrowed at 3% or 4% in 2019 through 2021 and now face refinancing at 7% or more. For many of those owners, the new payment does not work at today's rents and values. Some will have to add cash, sell or hand the keys back.

If rates keep rising, that squeeze spreads. Higher rates push up the returns buyers require, which pushes values down, especially for older office buildings and properties with short-term leases. That is a correction, and it is already happening in parts of the office market. It is not the same as a market-wide collapse.

What we are seeing in the Phoenix area

Industrial is holding up

Kidder Mathews reports Phoenix industrial vacancy at 11.5% in the third quarter, down from 13.3% a year earlier, with asking rents up 5% year over year and 12.8 million square feet absorbed so far this year.

Office is stable but soft

Phoenix office vacancy is 23.7%, roughly flat from a year ago, and asking rents are up 2%. Sales volume is up nearly 15% year over year as buyers pick up discounted buildings. The East Valley sits at about 24% vacancy, but it varies widely: downtown Mesa is near 13%, while parts of east Mesa are above 34%.

Location and leases matter more than ever

Well-located, updated buildings with strong tenants are holding value. Older buildings with short leases and big loans are the ones under pressure. That gap is likely to widen if rates stay high.

So, is a crash coming?

Our read: a 2008-style crash across all of commercial real estate is unlikely, because the conditions that caused it are not here today. What is likely is a continued, uneven correction. Weaker office buildings and over-leveraged owners will keep feeling pain, and values will stay under pressure as long as the 10-year Treasury sits near 5%. Meanwhile, well-leased industrial, retail and land in growth areas are holding up.

Nobody can predict the market with certainty. A recession, a jump in unemployment or a shock in the bond market could make things worse. That is exactly why owners should plan now, not wait.

What owners and buyers should do now

  1. Know your loan maturity date. If your loan comes due in the next 24 months, start planning today. Options narrow as the date gets closer.
  2. Stress-test your refinance. Run your numbers at 7% or higher. If they do not work, it may be better to sell on your timeline than a lender's.
  3. Get a current valuation. Values have moved since 2021. A current opinion of value tells you where you really stand.
  4. If you have cash, watch for opportunities. Corrections create buying opportunities, especially from sellers facing refinancing deadlines.

Sources

This article is general market commentary, not investment, legal or financial advice. Talk with your lender, tax advisor and broker before making decisions about your property.