More than three months after the United States and Israel launched coordinated military strikes against Iran on February 28, 2026, the geopolitical backdrop remains unsettled. Diplomatic tensions, intermittent blockades and regional proxy hostilities are feeding through to the U.S. economy and influencing the outlook for commercial real estate.
In a recent Marcus & Millichap video, Senior Vice President John Chang outlined how the conflict is flowing into key inflation gauges. He noted that oil prices are elevated but currently trading within a range, helped in part by the release of crude from the U.S. Strategic Oil Reserves. At the consumer level, the Consumer Price Index moved from 2.4% year-over-year in February to 3.8% in May.
Producer prices have accelerated even more sharply, with the Producer Price Index rising from 3.4% in February to 6.0% in May. Meanwhile, the Personal Consumption Expenditure price index increased from 2.9% in February to 3.8% in April. Chang emphasized that all of these readings sit well above the Federal Reserve’s 2% inflation target and have materially altered expectations for interest rates.
Earlier in the year, many forecasters anticipated that 2026 would bring a series of Federal Funds Rate cuts, albeit in a choppy pattern similar to 2025, with perhaps one or two reductions. By mid-2026, however, that outlook has reversed. Chang highlighted that Wall Street now assigns roughly a 50% probability to a rate increase before year-end, while interest-rate futures traders are pricing in a 75% chance that the Fed will lift its benchmark rate by a quarter point.
This shift in expectations has pushed Treasury yields into a 4.2% to 4.5% range. The appointment of Kevin Warsh as the new Fed chair in May 2026 adds another layer of uncertainty. Chang suggested that Warsh may find it difficult to justify a rate cut in the current inflation environment, yet could also be reluctant to endorse further increases. Warsh is only one of 12 voting members on the Federal Open Market Committee, so any policy decision will depend on the broader committee’s consensus.
Chang also noted that a credible path toward resolving the Middle East conflict could ease energy-driven inflation, which in turn might alter the rate trajectory. For now, though, higher and more volatile borrowing costs are a significant headwind for commercial real estate. Deals that penciled out 90 days ago may no longer meet return thresholds under current rate assumptions, even as the market had begun to stabilize over the past year.
Despite this, capital is still flowing into commercial real estate assets. Interest rate volatility, however, has the potential to slow transaction activity as buyers, sellers and lenders recalibrate underwriting to the new cost of capital. At the same time, Chang pointed to several fundamental supports for the sector: demand for commercial real estate remains solid, new supply pipelines across major property types are shrinking, and average national rent growth across asset classes is expected to stay positive for the balance of the year.
In Chang’s view, the combination of durable demand, constrained new construction and ongoing rent growth leaves the sector reasonably positioned to manage short-term macro and policy headwinds while maintaining prospects for longer-term expansion.
