An economic downturn ups a lender’s risk, on even multifamily developments in tight markets like Boston. iStock illustration

Anxiety about an economic downturn is everywhere this fall. And if one hits, expect both traditional financial institutions and private lenders to take a step back from commercial real estate.

The U.S. unemployment rate was 4.4 percent in September of 2025, up from 4.1 percent in September 2024, according to the U.S. Bureau of Labor Statistics. As of publication time no September data was available for Massachusetts, but the Executive Office of Labor and Workforce Development said the state lost 3,800 jobs in August, for a seasonally-adjusted unemployment rate of 4.8 percent.

The Federal Reserve has also started to cut its benchmark short-term interest rate, concerned that its monetary policy was slowing the economy too much.

Employers are feeling worried, too. The Associated Industries of Massachusetts Business Confidence Index dropped 1.5 points to 47.5 on a 100-point scale in September. It marked the seventh consecutive month that the index fell below the 50 reading that separates optimism from pessimism.

The September index was 5.7 points lower than a year ago. The responses were collected at about the time that the Federal Reserve cut interest rates on Sept. 17 but before the Oct. 1-Nov. 12 federal government shutdown.

Greater Boston’s economic performance has slowed down opportunities for lenders to deploy capital in the region, said Jeff Myers, the Boston research director at commercial brokerage Colliers.

“Boston‘s economy has been underperforming the national economy for the past couple of years, and that held back some of the ability of our commercial real estate market to really reach its full potential,” he said.

Expect Banks to Scrutinize Deals

The trajectory of rents and interest rates, as well as how the broader economy performs, all affect decisions lenders make on funding a project.

Essentially, a banker’s appetite for risk goes down as uncertainties about consumer and business spending go up.

“Are people willing to pay those premium, class A rents, or are they going to start going down to class B and C product? You’re also going to be seeing in the lower on the lower end, consumers really start feeling a pinch,” said Philip Soares, head of commercial real estate lending at Salem Five. “That’s where we just have to pay attention to that.”

Demand for new housing will still exist in Massachusetts, but it’s uncertain how rising construction and capital costs will affect the ability of projects to get off the ground during a potential economic downturn, Myers said.

If rents growth continues stagnating as it did in the third quarter thanks to a pulse of new developments coming online, the overall attractiveness of multifamily projects could decline while lenders become more selective. The proposed rent control ballot measure, if successful, would make multifamily projects even less attractive, he said.

“The next set of boxes you look at is, how much does actually cost built this stuff?” Myers said. “We can look at the cost of raw materials. We can look at the cost of design services. We can look at the cost of construction labor, and we can see that all of those costs have generally risen over the past several years. Although you may have a particular component of construction that may have gone back down a little bit, there’s not a retreat back to the building cost of 2019.”

Any economic downturn would hit a multifamily development sector facing slowing rent growth – at least temporarily – and with no relief in sight for high construction costs. iStock illustration

Additionally, projects have to worry about the trajectory of interest rates. While the federal funds rate has seen cuts, the 10-year Treasury rate has largely remained in the same narrow band since mid-September, keeping the interest rates on most new commercial real estate loans steady.

With banks currently tightening lending standards, Myers said, it could be more difficult for new construction projects to find funding.

Private Lenders Could Face Challenges, Too

When many banks shrank their exposure to commercial real estate lending after the 2023 bank crisis, some developers turned to private credit for gap-filling mezzanine debt or simply faster action on their applications.

In a downturn, national private lenders could retreat from the Boston market, said Sean Kelly-Rand a managing partner at Boston-based private lender RD Advisors. That would allow for local lenders like RD Advisors to step in, he said.

There is also potential for local lenders to also struggle if the economy hits rough waters, said David Grossman, president of Quincy-based private lender First Boston Capital Partners.

“If the market does continue to stay soft, the availability of private debt may reduce because lenders that have been more aggressive, and to the extent they don‘t have a strong balance sheet, I think they‘ll be impacted,” he said.

Alternative lenders are also facing more competition between themselves, said Steven DiPrete, chief commercial banking officer at South Shore Bank.

“I think private lending, alternative lending to banks has had a very good impact on keeping development going in certain areas, but they‘re faced with similar challenges,” DiPrete said. “The thought process has always been that a private lender was always going to get a higher yield because they were returning speed – the things banks won‘t do – and for they got paid the higher yield. Well, that‘s great, but if there‘s 10 more of them, and now all of a sudden that yield isn‘t there, they’ve got to go a little bit further up the risk ladder to get that.”

Sam Lattof

Could Lenders Hit Pause?

With all of the unknown and risks heading into 2026, there is the potential for lenders to temporarily retreat from the market. Real estate development projects are already beginning to stall out or struggle to get off the ground floor, DiPrete said.

While concerning for developers, Colliers’ Myers suggested such a pullback might have a silver lining for asset classes like multifamily or industrial that currently have more empty space than demand.

For example, the apartment vacancy rate hit 11 percent last quarter in Allston-Brighton thanks to around 1,000 new apartments delivered in the neighborhood last year, according to Colliers data, slowing rent growth.

“It wouldn‘t be the worst thing in the world if we were able to take a little bit of a time to absorb some of the space that is already out there,” Myers said.