Lending appetite has been returning across banks, non-banks, and life companies, with early-cycle capital predictably flowing first to the safest assets and the strongest sponsors. The core driver discussed is a decline in short rates, which pushes investors and lenders back toward taking risk to earn returns, even as overall debt flows remain below “normal.” The conversation also explores how additional Fed cuts could pressure long rates lower and how upcoming Fed appointments could influence rate policy over the year.

On office, the conversation notes a meaningful rise in transaction volume concentrated in higher-quality properties, even while pricing remains well below peak. They point to two “green shoots”: vacancy no longer worsening and a sharply reduced new-construction pipeline that could make future absorption easier. The discussion closes with a sociological angle on work-from-home, suggesting younger cohorts’ negative memories of remote schooling may shape future preferences for in-person work and office culture.

Adam

Peter, welcome. Good to see you again.

Peter

Nice to be with you again from the snowy Northeast.

Adam

Starting at a high level today, there’s renewed activity on the lending front, especially from regional banks. Not just them; it's coming from all fronts since the first of the year. And SOFR bounced around last week in an interesting way although the 10 year really hasn't been moving much. Banks are coming back in. Are they cautiously reentering lending? Is it just stabilized assets with strong sponsorship?

Peter

It actually started in the last four months of last year, picked up steam the last two months of last year. You didn't see it as much in December because December is kind of a slow transactional month. And not just banks, but non-banks also. And life companies.

Why? The short rates are down. And people have to put money out to make money. They've got to take risk to make money.

And I said this before, imagine the Fed set the interest rate on the short end to a thousand percent. Who would do anything other than just sit and earn it, right? And as the short rate has come down to somewhere much closer to where it should be, you got to take risks to make money. And that's true if you're a bank, that's true if you're equity, that's true if you're a non-bank. That's what I think you're seeing.

And it's self-realizing, right? If you're doing it, I feel better doing it. And most institutional money, debt and equity, is not paid to take risk. It's paid to take risk when others are taking risk. They're paid to say, “basically everybody's taking risk and I want you to be the party who executes for me.” So it's still well below normal debt flows, but coming back.

Adam

How are they dipping their toes in the water? Is it geographically related? Is it product? Is it sponsors? Is it simply optimism or the shrinking of uncertainty?

Peter

It's typical early recovery of the capital market, which is it goes to the safest assets, it goes to the most transparent, it goes to the best quality sponsors. So where are you seeing it? You're seeing it well-located multi-family with good sponsors who have real equity.

You're seeing it in industrial if it's well leased with a good sponsor. You're starting to see shoots in the office sector. So they start in the bigger markets with the more institutional assets with the better sponsors. And every cycle of capital, it then rolls out from there.

My guess is by the end of the year, you'll see it filtering down, not to crap assets, but to less than best. Normal sponsors instead of good sponsors. I don't mean normal in a bad way, just the kind of typical sponsor. And then by the end of 2028, it'll be weak sponsors.

Daniel

So wait, you saying Adam can get a loan in 2028? He has to wait till then?

Peter

Got to wait, Adam; it could be until 2029.

Adam

Thank you both. I appreciate that. I see two different dynamics. You've got lenders who want to get into the space and then you've got the fact that the 10 year really hasn't moved that much. How would the Fed affect that?

Peter

If the Fed cuts another 50 basis points in the first six months, you'll see the long rate come down at least 25, probably more like 35 basis points. By the way, you're still earning a rich return, by historic standards on the short end. You're just not earning a spectacular return on the short end. So as that gets pushed to more normal, you'll see more money flowing elsewhere.

I think this year is going to be a surprise in terms of rates. First of all, if you take out shelter from the consumer price index, for the last two years, the rate of inflation has been 2.1% a year. The rate of inflation for the 30 years of CPI without shelter prior to COVID averaged 2.2% So inflation has normalized.

So add 75 basis points to that and at most [the Fed] should be at 2.75% to 3.00%. It's still at 3.50% to 3.75%. So they've got an easy 50 basis points. It's in them. They aren't going to do it this month. They're probably not going to do it next month. They'll do it probably in March-ish and then another one mid-summer.

The surprise is that you're going to get a couple of Trump appointments. And it's not like they're going to do what Trump wants. He's going to pick people who agree with his view. Big difference. The first one is bullying, and the other is having people that more or less align with your view. And this is an area where there's a lot of different views.

So for example, I say, I think the spread should be 50 to 75 basis points over inflation. He's going to pick people, legitimate people, who believe it should be 25 to 50. So you're going to get a couple of appointments like that and the dynamics are going to change.

And I would say late in the year, you're going to see another 50 basis points cut. So I think you have a hundred in the cards. I can easily back 50 of that. And then you'd really start seeing money come out for risk.

Adam

Do you think those appointments, in an effort to not seem like a Trump toady, slow down their cuts?

Peter

That's a great question. On the one hand, you'd say, I've been waiting a long time for this so let’s get it done. Let's get the work done. On the other hand is the sociology of it, as you're describing it. And I think it’s more likely that they say, yeah, let's get 25, let's even get 50 pushing it, that's why I think it's late in the year.

Daniel

This goes to the new accountability for these people that have had strongly held opinions that were frankly easy to have when they didn't have to be accountable to real economic impacts.

Peter

That's a good way of saying it. However, I wrote a piece about that. I was not a fan of the Fed keeping the rate at zero through the 2010s. Forget whether I was right or wrong; I wasn't a fan. And I said, the Fed members bear no consequences of their decisions because they're not going to get voted out. It's hard to find a group much less accountable than being a Fed member, except being a tenured faculty member.

Adam

Last question before we get off debt, of late lots of financing has come from the private side. A lot of funds have been raised because the risk adjusted returns have been great because traditional lenders have been more on the sidelines. Will the private debt funds deploy as rates go down?

Peter

They have a challenge. By the way, they've already had a challenge: They can't find deals equivalent to the amount of money that was raised. That didn't surprise me. They thought they were going to get double-digit unlevered returns and they'd lever it and get to 20. That’s hard to find. And if you do, you can't find another and another and another. As more money comes out, they face the problem that kind of money always faces: it's a great trade but it's a hard business.

Because once banks who have a lower cost of capital than you go from being not aggressive to aggressive, that’s hard to compete against. And that's always been a problem in that business: it works well in a cycle, but it's hard to build a long-term business around.

Daniel

It’s not helping that real estate overall has not performed well. Not just in relative sense to other investment opportunities, but relative to its own history. High debt costs, the office debacle, overbuilding in multifamily, some pretty transparent reasons why that's the case, but real estate has not looked that appetizing on the buffet of things that someone can invest in.

Peter

So you want to put that in a favorable light? The favorable light that you remember in your finance theory, you want assets that go down when other assets go up and up when others go down. Hey, real estate just did that! It smoothed your portfolio return. I don't think it intended to smooth your portfolio return, but you got to admit it did.

Daniel

Yeah, although it has to prove the other part now and go up.

Peter

That's exactly right. But I'm kind of joking. It has underperformed and you hit the reasons. If capital doesn't flow, capital intensive businesses get punished and real estate's capital intensive. But it did really well in 2021, 2022 when there was a real estate shortage. It wasn't seven years of plenty, but it was like two years of plenty, followed by two and a half years of famine.

Daniel

So that's a great pivot to office specifically. We just saw statistics on this. Sales in 2025 for office were up 20% year over year. That's $10 billion more of transaction volume than there was the year before. That sounds like a lot, and in relative sense, it actually is. Sales were up only 5% for multifamily, 12% for retail, 6% for industrial, and the total additional sales volume in dollars was much lower for those three as well vs. office.

Office pricing didn't change from the prior year. We're still 45% below peak, which was 2021. So the sellers aren't making more money than they were, but maybe they've sold now. What do you make of this meaningful increase in transaction value?

Peter

Okay, so that’s accurate. There's at least some semblance of a market for properties in the upper third of office quality. And I include quality not just in design and so forth, but location, design, tenancy, expirations, et cetera. Still not much market below the top third.

Adam

Are there green shoots in any market? I just saw a headline that Denver CBD specific is 40% vacant. No green shoots. But there's a lot of good headlines.

Peter

There are two green shoots. One is, it stopped getting worse. It stopped getting worse and in almost every market absorption is increasing. That's one green shoot. So what's the old phrase? First stop digging. So it appears the digging has stopped and there is some recovery.

The other green shoot people don't focus on: About 50 million feet of new office space got started in a typical year. This year it'll be six million, and next year it'll be three. And that's a green shoot, not for developers. But if there's no new space, it's easier to fill.

Daniel

You're right that nationally, vacancy peaked the middle of last year. And we saw, as you said, net positive absorption of that national level. That was in the second half of 2025. But vacancy rates in cities are all over the place. And some of those MSA vacancy rates are irrelevant because the delta between suburban and urban can be pretty wide. Every MSA is really at least two markets.

And actually to that, your point about the pipeline is right. And the constitution of the pipeline has really changed. The pace of building new office in urban areas is down 65% from peak. And the pace of building in suburban areas is down 35% from peak.

Peter

One other interesting thought I had… I think it's interesting, you tell me if I'm wrong. Start with this work from home phenomena, and focus on younger workers, okay? So you have this generation of younger workers who would have normally entered the office workforce, but in 2020 through 2025, they came out of university, it was all cool, they can work at home in pajamas, they can walk the dog, et cetera.

The people graduating today were in grade school or junior high when COVID happened. And their memory is what a shit show it was being online taking classes. They may have horrible memories of when they had to stay home and “do my job,” which was to go to school. And I think that sociological phenomenon is quite different.

Daniel

Yeah, that's very interesting and having kids that are soon to enter the workforce I know that they think and talk often about their experiences during COVID and that it was very unpleasant from a mental health and educational perspective. It was formative for them.

Flipping back to office for a second, historically about 35% of the pipeline was being built by the owner for the owner. But now new owner-occupied buildings is 50% of the pipeline.

So when you think about an office pipeline, if you're in the real estate transactions business, nearly all new supply is competitive. But actually only half of what's getting built is competitive.

Peter

It's very depressing if you're a developer of office property. Like, go see the world and come back two years from now, find some new sites and get them ready for five years from now, six years from now, and enjoy yourself in the meantime.

Daniel

To your point, we write a lot in the Haystack about work from home and, I don't want to say the permanence, but how long-term that trend is. That’s a pretty important consideration for people investing in office. And from where you can see right now, from now here to the horizon, what researchers are coming back with is that the work from home trend is not going away.

It's so well ingrained in the employee base that the 25% of days worked from home now in America will go up.

But the researchers leave open the idea which you suggested, that new cultural or psychological changes need to be in place for people to really prefer and to start asking to come back to work, to ask for more office space and better office space so they can get the social experiences and the mentoring experiences that they're missing.

Peter

Yeah. Well, and for the company to keep their culture. We'll see!

Daniel

Peter, as always, fantastic to see you. Thanks very much.

Peter

Great, thank you.

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