CRE Capital Flows Unevenly in a K-Shaped Economy

The term “K-shaped economy” entered the national consciousness during the COVID-19 recession of 2020. During the recovery, some businesses and households quickly rebounded, while others continued to struggle.

And that uneven economic landscape remains five years later, impacting everything from consumer spending and retail performance to multifamily demand and commercial real estate capital flows.  

Industry excerpts told Connect CRE that capital is available. However, it’s favoring stronger sponsors and high-quality assets in well-performing markets.

“The biggest theme is divergence,” said Ivan Viramontes, associate director with Talonvest Capital Inc. “Capital is available, but it’s not evenly distributed. It follows quality, sponsorship and geography more than ever.”

The K-Shaped Economy: Still Very Real

The experts interviewed for this story largely agreed that the current economy remains deeply bifurcated.

“Some industries, companies and households are booming, while others have been quietly in a recession for years,” said Fidelity Bancorp Funding CEO David Frosh. “Both are happening at the same time.”

Higher-income consumers, benefitting from strong equity markets, accumulated wealth and better earnings, have been better positioned to absorb rising costs. According to Gary Bechtel, demand for luxury products remains strong.

At the same time, lower-wage earners are increasingly struggling with inflation and debt.

“Lower wage earners are beginning to struggle, taking on more credit card and consumer debt,” said Bechtel, Red Oak Capital’s CEO and managing principal. “They’re more heavily impacted by rising costs and inflationary pressures from tariffs and the Middle East conflict.”

BGO’s Ryan Severino added that the divide is particularly visible between households that own assets and those that do not.

“Some households are doing well, especially those that own assets and have benefitted from asset appreciation,” said Severino, who is chief economist and head of research for his company. “Others are struggling, particularly if wages haven’t grown significantly and they don’t own assets.”

The CRE Impact

That economic divergence is also affecting the commercial real estate sector.

According to Severino, higher-income consumers continue to support luxury retail, high-street retail corridors and tourism-oriented destinations despite the broader economic headwinds.

At the same time, some lower- and middle-market retailers are facing mounting pressure, Bechtel observed.

Meanwhile, Ray Perryman, an economist and president and CEO of The Perryman Group, pointed to continued strength in industrial and logistics properties and data centers, driven by the rapid deployment of AI infrastructure.

And while top-tier multifamily assets continue performing relatively well, the sector is a prime example of a growing divide.

“The overhang of multifamily units at relatively high price points is beyond the reach of many in the lower part of the ‘K,’” Perryman said.

Viramontes agreed, noting that well-located multifamily assets in primary and gateway markets continue to see stronger rent growth. Meanwhile, renter-by-necessity markets in oversupplied metros are still dealing with concessions and weaker fundamentals.

Similar trends are emerging in self-storage. Higher-income customers may be less sensitive to rate increases, while operators in supply-heavy markets are pushing discounting to maintain occupancy.

Still, Viramontes cautioned that not all softness should be attributed to weakening demand.

“Some of the negative rent growth in both sectors reflects oversupply rather than pure demand weakness,” he said. “The two drivers need to be separated when underwriting.”

Capital Flows and Selectivity

The economic divide is also impacting capital movement.

Bechtel argued that today’s environment is not dramatically different from prior downturns, noting that substantial capital remains available across the risk spectrum.

“There is significant capital either in the market or on the sidelines waiting to come into the market,” he said. “I don’t subscribe to the philosophy that there’s any kind of pullback.”

Others see things a little differently.

Perryman said higher interest rates, lender priorities and ongoing uncertainty are driving capital to prime opportunities, while lower-quality office and retail assets continue struggling to attract traditional financing.

“Lower-quality office and retail space is facing very little traditional funding availability,” Perryman said.

Viramontes said lenders remain eager to back strong sponsors with institutional-quality assets in top-performing markets. Not so much for older or less stable properties.

“Capital is flowing toward assets with clearer business plans, better sponsorship and better locations, instead of broadly repricing everything the way it often did in prior downturns,” he said.

Caution? Or Creativity?

Views also differed on whether lenders are currently being overly conservative.

Slatt Capital CEO Daniel Friedeberg described the market as highly liquid, which is putting pricing under competitive pressure.

“Spreads are currently aggressive, but adequate in pricing most risks faced in today’s market,” he said.

Perryman, however, suggested some lenders may be overly cautious even with stable, well-leased properties, though he added that such caution remains warranted for weaker assets given shifting consumer and income trends.

Bechtel took a middle-ground view, arguing that lenders have learned from previous cycles and are structuring deals that account for risk.

“We’re seeing some lenders get very creative on deal structures and pricing up the stack accordingly for the risk they’re taking on,” he said.

Looking Ahead

Most of the experts said the near-term outlook for CRE capital markets remains relatively positive, particularly if liquidity conditions hold.

Friedeberg said the market should remain healthy as long as capital markets stay liquid. At the same time, Bechtel pointed to relatively stable interest rate expectations and broad capital availability across most lending categories.

“It’s a good time to be a borrower and a lender,” Bechtel said.

Still, the bifurcation defining the broader economy is unlikely to disappear anytime soon.

Severino noted that buyers continue to search for price discovery, sellers are still anchored to yesterday’s valuations, and lenders increasingly want “cleaner stories.”

Viramontes added that sponsors with strong track records and healthy balance sheets will likely continue seeing increased competition among lenders. Meanwhile, weaker sponsors could still secure financing, but possibly on less favorable terms.

“Capital won’t disappear,” Perryman said, “but it will continue to be significantly more selective.”