Walker & Dunlop Sees Rates Peaking as Data Center Boom Raises Red Flags

Key Points

• Interest rates may be near a peak: Economist Peter Linneman attributed the recent rise in Treasury yields largely to oil-price pressures from the Iran conflict and said rates could stabilize or decline if oil prices stop rising, though he expressed concern about Federal Reserve policy.
• Borrowers facing 2026–2027 maturities may need flexibility: Property owners could consider shorter two- or three-year financing, including floating-rate loans, to avoid selling or raising equity in a weak market while waiting for conditions to improve.
• Data centers show both strong demand and growing risks: Demand is expected to exceed supply through 2030, but high leverage, aggressive underwriting and inexperienced developers could lead to overbuilding. Linneman favored established developers with specialized construction, power and contractual expertise.

Walker & Dunlop NYSE: WD Chairman and CEO Willy Walker and economist Peter Linneman discussed higher interest rates, inflation tied to oil prices, commercial real estate financing and sector-level opportunities during the company’s quarterly Linneman discussion.

Linneman, who publishes the Linneman Letter, said the recent rise in long-term Treasury yields was primarily connected to the Iran conflict and its effect on oil prices. He said the 10-year Treasury yield had reached its highest level in 25 years and described that level as abnormal relative to the economic backdrop.

“I don’t see them going up,” Linneman said of rates, citing the 25-year high in the 10-year yield. He said inflation had generally stabilized before the escalation in Iran, but higher oil prices created a mathematical increase in measured inflation. If oil prices remain elevated but stop rising, however, their incremental effect on inflation would fall to zero over time, he said.

Linneman said that dynamic could eventually allow the Federal Reserve to reduce short-term rates, though he expressed less confidence in the timing of any Fed response. “The Fed worries me much more than normal,” he said, arguing that policymakers were moving in the wrong direction.

Advice for Borrowers Facing Near-Term Maturities

Walker noted that many property owners do not have the luxury of waiting through a full real estate cycle because they face refinancing requirements or investor liquidity needs in 2026 and 2027. In response, Linneman said owners should avoid selling in a bearish market if they can secure interim financing.

He said borrowers facing a near-term refinancing could consider two- or three-year financing, including floating-rate structures, rather than raising new preferred equity or common equity at a difficult point in the market. Linneman acknowledged that the recommendation runs counter to his normal preference for seven- to 12-year financing.

“Better to be dead two years from now than to be dead today,” Linneman said, describing the option value of retaining an asset until market conditions improve.

Walker pointed out that floating-rate borrowers would have incurred higher costs if they had followed earlier expectations for lower rates. Linneman responded that the magnitude of the current rate move was not broadly anticipated and said the yield level was not justified by underlying economics.

Labor Market and Immigration

Linneman said his broader measure of labor-market weakness is higher than the official unemployment rate because it includes people who are not employed and are not actively seeking work. He said that group remains unusually large and is likely a drag on economic activity, although he does not believe economists fully understand why so many people remain outside the labor force.

He characterized layoffs as low based on unemployment insurance claims, but said job creation has been mediocre. Linneman estimated that the economy could add roughly 800,000 jobs during the year, while Walker noted that job growth had slowed materially from prior years.

Linneman also said lower immigration reduces both the supply of labor and consumer demand. Immigrants add to the economy not only through employment, he said, but also by spending on goods and services.

Data Center Expansion Raises Concerns

The discussion also focused on data centers, where Walker cited rapid expansion in planned development and substantial spending by hyperscale technology companies. Linneman said he expects data-center demand to exceed supply through 2030, but warned that the sector could ultimately become overbuilt.

He said the unusually high yields that hyperscalers are willing to pay for data-center development suggest they are competing aggressively for capacity. Linneman contrasted those yields with those typically negotiated by major tenants for office or warehouse projects.

“When you see a whole bunch of unusual things happening at once, it generally doesn’t end that well,” Linneman said. He cited high leverage, aggressive lender underwriting and new developers entering the sector as potential warning signs.

Linneman said he would be particularly cautious about inexperienced developers attempting data-center projects based on expectations of high leverage and favorable market conditions. He said established large-scale data-center developers were better positioned to navigate the specialized construction, power and contractual requirements.

Multifamily Outlook and Office Opportunities

On multifamily housing, Linneman said declining construction activity could improve market conditions in 2027, although he does not expect broad 10% increases in face rents early in the year. Instead, he expects owners in some markets to benefit as concessions decline.

He said a reduction from one or two months of free rent to no concession can materially increase net operating income even if asking rents do not rise. Walker added that financing conditions remain a key constraint, particularly because higher rates require more equity for transactions at a time when equity capital is scarce.

Walker cited $232 billion of non-agency multifamily debt maturing in 2027 and said a substantial volume of multifamily debt will need refinancing over the next several years. He said lenders’ performance on existing portfolios will help determine how much capital remains available for new originations.

Linneman said he would invest $100 million of equity in apartments in growth markets where little new construction is expected, naming Austin, Nashville and Charlotte as examples. He said the strategy would require a long-term investment horizon and patience on the timing of rent growth.

For office properties, Linneman said investors cannot simply “throw a dart” because market and asset quality vary substantially. However, he said capital is again available for well-selected office investments, unlike two years ago when even experienced buyers had difficulty securing financing.

About Walker & Dunlop (NYSE:WD)

Walker & Dunlop, Inc NYSE: WD is a commercial real estate finance and advisory company that provides capital and transaction services to property owners, investors, developers and other real estate participants. The company serves clients across major commercial property sectors, including multifamily, office, retail, industrial, hospitality and healthcare.

Its services include commercial real estate lending, debt and equity financing, investment sales, property sales, loan servicing, valuation and advisory services.

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