CRE Continues to Adjust as Fed — Once Again — Holds Rates Steady

The Federal Reserve held interest rates steady for a fifth straight meeting Wednesday despite President Donald Trump’s repeated demands for lower borrowing costs. 

The Fed kept its benchmark interest rate at between 4.25 percent and 4.5 percent, stating that “uncertainty about the economic outlook remains elevated.” 

“Although swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year,” the post-meeting statement read. “The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated.”

As Trump’s trade war continues, the Fed is holding to its “wait-and-see” approach regarding the health of the U.S. economy, and assessing “incoming data, the evolving outlook, and the balance of risk,” the statement read. 

It’s not just steady interest rates that are under attack at the Fed today. The central bank’s 9-2 hold vote — with governors Michelle Bowman and Christopher Waller in opposition — occurred just two weeks after Trump drafted a letter outlining plans to move ahead with firing Fed Chair Jerome Powell, adding to the market uncertainty on top of unknowns about inflation and tariffs.

Todd Henderson, head of real estate for the Americas at DWS, said the possibility of Trump firing Powell is likely just “noise” to try and dictate interest rate policy. Henderson said he does not expect such a move to happen given the president’s respect for Treasury Secretary Scott Bessent, who is reportedly against it. 

“The independence of the Fed is something that I think investors globally appreciate about the system,” Henderson said. “I think that doing anything to materially change the way that the Fed operates and the independence that it enjoys could be pretty disruptive, and I don’t think that Trump and/or Bessent will allow that type of disruption.”

Henderson said transaction volume is starting to pick up of late as CRE market participants get comfortable with long-term interest rates dictated by the 10-year Treasury yield, which has hovered in the 4 to 4.25 percent range for the last month. He is projecting that Treasurys will soon settle in the 3.75 percent to 4 percent range, which will spark even more deal activity later in the year. 

Jay Neveloff, partner and chair of U.S. real estate at HSF Kramer, said that while there have been plenty of transactions of late, especially on the recapitalization front, some CRE owners are playing the long game, waiting for interest rates to drop as they raise plenty of capital from investors for future deals. 

“We haven’t had a basis to evaluate prices in years because of COVID, so some are going to wait as long as they can,” Neveloff said. “That’s a conversation I have with clients all the time who are sellers who want to wait for the market to get better.”

Neveloff added that a boost in recaps this year has resulted in far fewer loan sales than initially anticipated given how much distressed debt is outstanding that was issued at far lower interest rates, with some lenders not wanting to take a loss and deciding to see what happens with interest rates. He noted that lenders have started the process of taking enforcement actions on loans past their maturity date while also tracking what may happen with interest rates before executing. 

Stewart McQueen, a partner within Dechert’s global finance practice and head of the law firm’s commercial mortgage-backed securities (CMBS) group, said there has been a “general acceptance” of the higher-for-longer interest rate climate this year. McQueen noted that many sponsors are willing to borrow at higher costs for certain properties in the CMBS market. 

McQueen said with high prospects of lower interest rates in the near future, he does not foresee a spike in distressed loan sales.  

“Special servicers in these CMBS deals for securitized products when they’re in a distress scenario are evaluating the best possible outcome from a net present value perspective,” McQueen said. “If they envision or believe that rates are going to come down and that could improve performance and produce a greater result, they’re not going to rush to sell the loan or rush to foreclose.”

For now, there’s hope of cuts at the next Fed meeting. 

“The decision to hold was expected, but it doesn’t shift the path. The Fed has likely just bought itself eight more weeks before a pivot,” Nigel Green, CEO of global financial advisory firm deVere Group, said. “We now expect that by September, the underlying softness in the economy will make a cut not just justified, but necessary.”

Andrew Coen can be reached at acoen@commercialobserver.com.