CRE Braces for Increased Costs From Fed Changes: NYU Schack Panelists

The commercial real estate market may face the prospect of higher borrowing costs even as President Donald Trump places downward pressure on the Federal Reserve, leading lenders stressed at the 58th annual New York University Schack Institute of Real Estate Capital Markets conference Wednesday. 

While the Fed is expected to lower short-term interest rates at its December meeting and again in early 2026, the 10-Year Treasury yield would rise if Trump pushes too hard for cuts due to inflation concerns, potentially resulting in higher cap rates, according to Jeffrey DiModica, president of Starwood Property Trust. DiModica said the market is projecting four 25 basis point cuts in the near term with the Secured Overnight Financing Rate (SOFR) affecting transitional floating-rate loans dropping from 4 percent levels to the low 3 percent range by early 2027.

“The problem is if he lowers rates more than 25 basis points four times, the 10-year is actually going to go higher because you’re going to expect that you’ll create inflation more than the forward curve is pricing it today,” said DiModica during the NYU conference’s global finance and capital markets panel held at The Pierre Hotel in Manhattan. “He’s going to put the pedal down on SOFR, and that’s the real risk to real estate markets because the cap rates are going to be run off the 10-Year.”

Since January, when he took office a second time, Trump has pushed for the firing of Fed Chair Jerome Powell and for more political control of the central bank in an effort to lower interest rates. 

DiModica said that CRE owners are most anxious about future interest rate environments and that lenders are also looking for lower rates to help navigate legacy books from loans issued prior to the Fed hiking borrowing costs from near zero levels starting in early 2022. However, he noted that lenders make more money on new issuances when interest rates are higher, underscoring how future central bank policy will affect landlords that much more.

Miriam Wheeler, head of the global real estate financing group at Goldman Sachs, said the investment bank is forecasting 2 to 2.5 percent of gross domestic product growth next year, setting up for additional two Fed cuts in the spring to bring short-term rates to a range of 3.25 to 3.5 percent. She cautioned though that Goldman Sachs is closely tracking certain risks to the labor market, with some metrics showing increasing layoffs and the unemployment rate above 8 percent for people ages 20 to 24.

Wheeler added that Goldman Sachs also projects long-term interest rates to hover in the 4 to 4.5 percent range over the next decade. 

“That’s just a function of government debt and all the spending that has happened, so we think you’re going to see a steeper yield curve,” Wheeler said. “The back end is going to stay higher.” 

The global finance and capital markets panel— moderated by Dino Paparelli, global head of commercial real estate at Deutsche Bank — also featured Bryan Donohoe, partner and head of U.S. debt at Ares Real Estate. 

Wheeler noted that CMBS volume is on track to reach around $125 billion in volume this year, a historically high number for the market. She said the bulk of this debt has derived from singe-asset, single-borrower deals that offer floating-rate, prepayment flexibility compared to fixed-rate conduits, which are seeing a lot more competition from life companies. 

Much of the 2025 CMBS issuance has centered around office assets, but the lending fundamentals of this sector vary differently by submarket, according to Donohue, noting the leasing success of Manhattan’s Midtown East area around Park Avenue as particularly standing out. 

“You can look at Park Avenue and see some of the most healthy fundamentals in the history of the city,” Donohue said. “If you go back to 2009 and 2010, rents were probably $60 and maybe $100 and now they are $200. For prime-quality buildings you can actually make sense of underwriting the renovation, putting in the amenity center, the gym, and getting tenants to pay that rent.”

While Miami has enjoyed momentum in recent years from population gains, DiModica stressed that the city’s residential growth has slowed of late, which will affect demand for office space. DiModica, whose Starwood headquarters is based in Miami Beach, said some of the people who moved to South Florida at the height of the COVID-19 pandemic from the Northeast have since moved back, and he sees challenges attracting workers with families who have roots up north. 

“I think the middle of the Miami [office] market is going to get weaker,” DiModica said. “I think the bloom is off the rose in Miami from a leasing perspective.” 

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