Analysts from Fitch Ratings say stagflation is likely to lead to lower CRE valuations and a "prolonged period" of elevated cap rates.

"Stagflation is the primary potential macroeconomic risk currently facing commercial real estate," analysts note. "High inflation and weak economic growth could result in lower CRE valuations. This would be due to modestly growing or declining nominal net operating income (NOI) from soft tenant demand and elevated capitalization rates reflecting a higher risk premium."

Fitch analysts say that historically, nominal CRE values increased in periods of sustained rising interest rates, and property-level NOI "tended to keep pace with, or grow faster than, any increases in cap rates." But "long-term Treasury rates have increased since January 2022," they say. "All-time low cap rates heading into 2022 and weaker cash flow growth may herald lower values in a rising interest rate environment."