Fed Holds Interest Rates Steady as CRE Adjusts to Higher Borrowing Conditions 

The Federal Reserve held interest rates steady for a second straight meeting Wednesday, even as concerns about a potential recession mount amid a trade war sparked by President Donald Trump’s tariff policies.

The expected move by the Fed kept the benchmark interest rate at between 4.25 percent and 4.5 percent, with the central bank indicating possible cuts later this year depending on how the economy performs. Inflationary pressure remains a chief concern, however, and the Fed also stressed the importance of maintaining its 2 percent inflation goal over the long run when enacting any monetary policies. 

“As the economy evolves we will adjust our policy goals in a manner that best promotes our maximum employment and price stability goals,” Fed Chair Jerome Powell said in a post-meeting press conference. 

“If the economy remains strong and inflation does not move sustainably toward 2 percent we can maintain policy restraint for longer,” Powell continued. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly.”

When asked about chances of a recession, Powell said they have “moved up” but is “not high.”  

The Fed’s decision to pause interest rates in its second meeting of 2025 comes on the heels of enacting cuts of 100 basis points in its final three meetings of 2024. It previously implemented interest rate hikes in 11 out of 12 meetings between March 2022 and July 2023 to confront growing inflation before pausing further rate hikes over the ensuing year. 

While the commercial real estate industry continues to face “higher for longer” borrowing conditions, transaction volume still appears poised for an active 2025 thanks to more clarity on ranges for where long-term interest rates will end up. 

“I think the market is getting comfortable with the interest rates and they’ve accepted the fact that this is going to be the range for interest rates,” said Jay Neveloff, chair of law firm Kramer Levin’s real estate practice. “I’m seeing an increasing velocity of deals.”

Neveloff noted that he is actively interviewing  experienced attorneys to hire because of the increased deal volume, and with more players putting less money in the stock market and seeking alternative investments like real estate. He stressed that those able to invest in commercial real estate debt have a “generational opportunity” because of certain distressed properties that are now undervalued and just need a recapitalization investment. 

The central bank also released its latest “dot plot” matrix” of individual committee members, which projects two quarter-point cuts in 2025. The grid also forecasts two interest rate cuts in 2026 and one in 2027, which would bring short-term rates to just above 3 percent. 

Lisa Pendergast, executive director of the Commercial Real Estate Finance Council, noted that there are $957 billion of maturing loans this year, a 67 percent increase from 2024, which reflectshow many deals were granted extensions. The challenge for many borrowers is still how to get refinancing for some distressed assets that are now facing interest rates around 100 basis points higher than origination, according to Pendergast, but she still expects many deals to get executed.

“I still think you’ll see these loans get refinanced, but you might have a borrower who needs to put more money in, and the willingness to do that really depends on how much the asset has been impacted,’ Pendergast said. “It’s going to remain challenging, especially the combination of that higher refi rate as well as potentially the asset not performing like it was when it was  originated five, seven or 10 years ago.”

While Pendergast expects many loans to get resolved, she also projects a moderate increase in delinquencies this year, especially for older Class B office properties with low occupancy. She said over the next 24 months many of these loans will be sorted out, with some properties converted to alternative uses such as residential. 

Stewart McQueen, a partner within Dechert’s global finance practice and head of the firm’s commercial mortgage-backed securities (CMBS) group, said elevated interest rates will not preclude deals from getting done for the top assets, including office buildings with strong sponsorship and leasing activity. McQueen stressed that this dynamic played itself out during Tishman Speyer’s recent successful CMBS refinances of Rockefeller Center and the The Spiral office complexes that Dechert served as legal adviser for with both deals generating strong investor demand. 

McQueen stressed that clarity about where interest rates are headed is a key factor that will dictate how much transaction volume there is in 2025. 

“If you know what environment you’re operating in, you can transact,” McQueen said. “If you don’t know what the market’s going to be like in a week or two, the uncertainty will cause you to pause. And we’ve actually seen this in the first quarter where timelines get compressed or expanded based on what the current markets are doing.” 

Ron Dickerman, president and founder of Madison International Realty, described transaction volume during the first quarter of 2025 as “marginally better” than the year-ago period, with more clarity on interest rates, but he stressed there are concerns about President Trump’s economic policies like tariffs igniting inflation. 

“We have some turbulence but at least we have more certainty,” Dickerman said. “I think 2025 is going to be a slow warmup, but emphasis on slow.”

Prashant Raj, managing director of U.S. debt at QuadReal Property Group, said he expects long-term interest rates to hover around 3.5 percent to 4.5 percent and are unlikely to approach anything close to 2021 levels absent a major economic downturn. He said the higher interest rate conditions provide opportunities for an alternative lender like QuadReal that has been more focused on providing gap financing of late. 

“Our assumption for this year is that the long end of the curve remains elevated,” Raj said. “I don’t think rates come down low enough where it solves the gap stack problem, which is a great opportunity for a lender of our profile that’s willing to go up in the stack if there is fresh equity. So we’re very focused on that opportunity, which we think will come over the next 12 to 24 months.”

J.C. de Ona, president of the Southeast Florida division at Centennial Bank, said the lowering of  short-term interest rates at the end of 2024 helped spur more construction financing activity early this year. De Ona said the 10-year Treasury remains the bigger focus though when it comes to the bank’s takeout construction loans or permanent financing, which he hopes remains stable amid concerns about some of President Trump’s economic policies sparking inflation.  

“I saw a lot of refinances over the last 30 days … and I saw people moving to permanent loans because of it,” said de Ona of the 10-year Treasury dropping into the low 4 percent range after nearing 4.8 percent in January. “There’s been a lot of talk about tariffs and Trump’s policies — which you would think are inflationary, so in the short term we may see some pain there, but hopefully in the long term that’s not the case.”

Andrew Coen can be reached at acoen@commercialobserver.com