What the Fed’s Latest Rate Cut Means for Commercial Real Estate

The Federal Reserve cut interest rates a quarter point Thursday, continuing a slow downward trajectory of reducing borrowing costs that last year reached their highest levels in more than two decades.

The Fed dropped its benchmark interest rate by 25 basis points to between 4.5 percent and 4.75 percent, marking the second straight reduction following an aggressive half-point cut in September. The central bank previously had hiked interest rates in 11 of 12 meetings between March 2022 and July 2023 from near-zero borrowing levels before pausing for more than a year in an effort to combat high inflation levels.

“This further recalibration of our policy stance will help maintain the strength of the economy and the labor market, and will continue to enable further progress on inflation as we move toward a more neutral stance over time,” Fed Chairman Jerome Powell said in a post-meeting press conference. “We will continue to make our decisions meeting by meeting. As the economy evolves, monetary policy will adjust in order to best promote our maximum employment and price stability goals.”

Powell did not indicate whether another rate could be in store for the Fed’s December meeting noting it will be based on the latest economic data and inflation trends. Powell said Thursday inflation has “eased substantially” from a previous peak of 7 percent to 2.1 percent.

Thursday’s rate cut came two days after the election of former President Donald Trump, who will return to the White House on Jan. 20. Trump nominated Powell to lead the Fed in 2018, but said during the 2024 presidential campaign he would not reappoint him.

Powell said Thursday the election results would have “no effect” on the Fed’s policy results in the near-term. The Fed chair also said he would not step down if asked by Trump to leave before his current term expires in 2026 and stressed that it is not permitted under current laws.

The Fed’s quarter-point cut came hours after S&P Global Ratings Economics released a report warning that some of Trump’s proposed economic policies, including curbing immigration and reducing corporate taxes, could result in higher interest rates over the long term. S&P said if tax cuts are not paired with reduced federal spending, it would likely lead to a higher federal budget deficit that could necessitate higher interest rates. 

The commercial real estate industry hopes a steady lowering of interest rates will spur more transaction activity heading into 2025. 

Jay Neveloff, chair of law firm Kramer Levin’s real estate practice, said he has seen clients who have been on the sidelines display more confidence toward investing in CRE since the Fed began lowering rates in September, with increased interest in underwriting.

“There is a growing number of people with equity moving forward with deals,” Neveloff said. “There are still some that aren’t quite there yet, but more and more people are there and look like they’re willing to commit to deals, and I think another 25 basis points cut helps that.”

Laura Swihart, co-chair of Dechert’s global finance and real estate practice groups, said while there was an initial boost in deal activity following the Fed’s September meeting, the momentum was quickly halted when long-term interest rates trended back upwards. She said, though, that a quarter-point rate cut coupled with the conclusion of the presidential campaign should help spur more commercial real estate transaction volume.

“I think the market will pick up again and help people stabilize going forward,” Swihart said. “It will stabilize the new loans coming to market.”

Swihart stressed that a 25 basis point cut won’t do much to help seasoned loans issued when interest rates were far lower that are maturing soon, and she predicted those loans will still have trouble getting refinancings. She said banks in particular have plenty of older loans on their books, which has been a big reason why many have not been active lately with balance sheet loans.

Neveloff added that in 2025, as more lenders resume actively deploying capital, it will present a “generational opportunity” for CRE equity investors to gain healthy returns on properties at low price points where owners need to sell due to distress from maturing debt. He said there has been interest in taking advantage of these market opportunities, particularly from private equity funds, hedge funds and family offices. 

Ryan Severino, chief economist at BGO, also sees potential for CRE investment activity picking up if inflation continues to decelerate and interest rates head lower. 

“With consumers feeling a bit more upbeat and public markets reaching record highs, the combination of strong economic fundamentals and declining interest rates could create an ideal backdrop for CRE investments over the medium term,” Severino said. “Certainly risks remain, but thus far they seem surmountable by the economy’s momentum.” 

Andrew Coen can be reached at acoen@commercialobserver.com