Fed’s Third Straight Rate Cut Has CRE Anticipating More Activity in 2025

The commercial real estate industry received a holiday gift to close 2024 with the Federal Reserve enacting its third straight interest rate cut, but the central bank’s 2025 plans may leave plenty of coal. 

The Fed reduced its benchmark interest rate by a quarter point, or 25 basis points, to a range between 4.25 percent and 4.5 percent. The rate cut comes on the heels of another quarter-point drop on Nov. 7 and a half-point cut in September. 

However, the central bank also indicated in its post-meeting report that only two Fed cuts may be in store for 2025 based on the “dot plot” matrix of individual committee members. In September, the Fed had projected four rate cuts next year. 

The late-year Fed rate cuts come in the wake of 11 interest rate hikes in 11 out of 12 meetings between March 2022 and July 2023 before a 14-month pause in efforts to combat high inflation levels.

“With today’s action we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” Fed Chairman Jerome Powell said in a post-meeting press conference. “We can therefore be more cautious as we consider further adjustments to our policy rate.” 

Powell noted that the median projection of Fed committee participants indicates a federal funds rate of 3.9 percent at the end of next year and 3.4 percent at the end of 2026. He said some Fed committee members indicated their decision was influenced by uncertainty about inflation under a new presidential administration.   

When asked if he would rule out a rate hike in 2025 based on progress with inflation, Powell said, “that does not appear to be a likely outcome” calling the current range around 4.3 percent as “meaningly restrictive and a “well-calibrated rate for us to continue to make progress on inflation while keeping a strong labor market.”

Wednesday’s Fed meeting is the last one before former President Donald Trump retakes the Oval Office on Jan. 20 following his election win last month. The Republican has proposed policies such as lower corporate taxes, tariffs on imported goods and deportations of migrant workers — actions that some in the CRE industry worry could result in higher interest rates over the long term from renewed inflationary pressures.

Lisa Pendergast, executive director of the CRE Finance Council, said that while another interest rate cut is welcome, more cuts are needed to help maturing loans that were issued when borrowing levels were at near zero a few years ago. 

“No doubt this helps, but it’s not the panacea because you would need I think another 100 basis points for this to kind of clear up the issue as it relates to refinancing existing low coupon loans on commercial real estate into today’s environment,” Pendergast said. 

The central bank’s decision Wednesday was not unanimous, with Cleveland Fed President Beth Hammack voting no and preferring to maintain previous rate levels. 

The property sector that stands to benefit most from the Fed’s latest interest rate cut is multifamily, according to Kevin Fagan, head of CRE economic analysis at Moody’s. Fagan said even a “moderate decrease” in interest rates offers some relief for multifamily owners who have faced upward pressure on previous low cap rates since 2022. It sets the stage for more favorable borrowing conditions next year when “near record” absorption is expected to occur. 

“The health of the transaction market and and the ability of borrowers to be able to refi is improved if rates start ticking down because that’s really the crux of the challenges for both the lending and the sales market,” Fagan said. “Lower interest rates will help multifamily more than the others just because that cap rate spread is so tight for them.” 

Jay Neveloff, chair of law firm Kramer Levin’s real estate practice, said another interest rate cut gives the CRE market added assurance to transact in the near term.

“I think it’s going to give commercial real estate lenders and investors a little bit more confidence that there’s stability,” Neveloff said. “There will be a little bit of tension and pressure on pricing, but deals need to get done as there is too much need to transact and there’s too much money on the sidelines.”

Neveloff noted that another factor that could be a catalyst for more transactions in 2025 is many lenders are looking to sell loans or refinance debt with paydowns that will require recapitalizations. He also added that landlords will likely seek out equity investors for existing deals to avoid losing their properties. 

Tamás Márk, global head of real assets at IQ-EQ, said he is going into 2025 with an “optimistic” but also “realistic” outlook for CRE investing. He said a third straight interest rate cut helps bring more clarity to the market in terms of pricing, and that can spur more transaction activity. 

“I certainly think that this rate cut will help in a way that sort of solves the biggest issue in the market currently, which is we have buyers and sellers that don’t meet in terms of pricing,” Márk said. “The market needs some stability.”

Márk noted that CRE investments have been hit harder by higher interest rates than other asset classes because many properties have higher leverage, which creates “an immediate impact” on valuations. He said leading indicators signal some improvements for the CRE debt markets, with lenders charging lower spreads compared to the beginning of the year. 

Andrew Coen can be reached at acoen@commercialobserver.com