Fed Pauses Interest Rates Cuts, but CRE Deal Flow Projected to Forge Ahead

The Federal Reserve paused interest rates Wednesday, its first policy decision of 2025, reversing a series of cuts even as President Donald Trump has said he will “demand that interest rates drop immediately.” 

The decision to hold steady on interest rates signaled a continued path of “higher for longer” borrowing conditions in a move that was largely expected, and which should do little to disrupt commercial real estate transaction volume this year.

The Fed maintained its benchmark interest rate at between 4.25 percent and 4.5 percent after enacting cuts of 100 basis points in its three prior meetings starting in September. Fed Chairman Jerome Powell indicated in a post-meeting press conference that Trump’s hope for future rate cuts might be in doubt this year due to a strong labor market and continued inflationary pressures.  

“With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” Powell said. “If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer.” 

Powell declined to comment on Trump’s demands for lower interest rates and said he has had no communication with the president since Trump took office on Jan. 20. 

Wednesday’s pause marks the first time the Fed held interest rates steady since July 31, the last of a 14-month run of pausing interest rates after 11 hikes out of 12 meetings between March 2022 and July 2023 in an effort to confront inflationary pressures. 

Lisa Pendergast, executive director of the CRE Finance Council (CREFC), said the Fed keeping interest rates at elevated levels in early 2025 should not impact deal flow given there is more clarity in the market about borrowing conditions and cap rates. 

“The heightened clarity on where some of these assets actually would trade makes all the difference,” Pendergast said. “I think folks will be mildly to very conservative on where they’re hanging valuations on the underlying assets.”

Pendergast said 2025 is poised to be a big year for the commercial mortgage-backed securities market with volume expected to number from $130 billion to $140 billion this year compared to $104 billion in 2024, which was already nearly three times higher than 2023. She also stressed that bank balance sheet lending could get a boost if there are indications that the Trump administration will not impose the Fed’s Basel III proposal to require the largest banks to increase their capital requirements.

Wednesday’s Fed meeting came a day after CREFC released its fourth-quarter Board of Governors Sentiment Index showing a 5 percent improvement in market confidence from the previous quarter. The survey showed that 95 percent of respondents expect CRE transaction volume to increase by at least 10 percent in 2025. 

Jay Neveloff, chair of law firm Kramer Levin’s real estate practice, said prolonged higher interest rates should not prevent transaction activity in 2025 given that many loans are already past maturity dates with lenders far less likely to grant extensions now. 

“There’s a direct correlation between interest rates and pricing, but people need to transact and I’m hearing more and more about lenders enforcing their rights and lenders enforcing maturity dates,” Neveloff said. “People either have to pay off the debt or they have to get an extension, and they’re not getting an extension without paying down some of the debt, so that means there’s going to be recapitalizations.”

Neveloff noted that what’s driving the motivation to hunt for deals is private equity funds, which have been in a holding pattern over the past few years as many deals were extended during COVID-19. He said the investors of these funds are looking to close out the previous funds, with many offices in particular eyeing recap opportunities with a long-term view for certain assets. 

Nina Roket, co-managing partner at Olshan Frome Wolosky, said expectations for interest rates remaining higher this year have already been “baked into the market,” and many in the CRE industry have since come to grips with the new reality.

“I think real estate professionals, although they were hoping for a more aggressive reduction in rates, I think already know that that’s not happening and have accepted that,” Roket said. “They’re transacting on that basis and understanding that the interest rates will probably continue to be steady.”

Lee Brodsky, CEO of BEB Capital, said that while elevated interest rates have slowed his firm’s business on the equity side, its credit platform has remained robust by providing floating-rate debt on mostly industrial and multifamily assets. BEB’s lending platform, which was launched in March 2020 during the onset of the COVID-19 pandemic, is looking to deploy the remaining 25 percent of its first fund by late spring and then raise another $200 million for a second fund.

Brodsky said the Long Island-based firm will remain more selective with equity transactions thanks to a high interest rate climate and instead will focus largely on industrial assets in the Southeast U.S. with low vacancy rates below 4 percent.

“Lower interest rates would be beneficial to us from a volume perspective,” Brodsky said of BEB’s equity platform. “Anything that we are looking to sell is being negatively impacted because all sellers look at exit cap rates, and that has to be based off of the 10-year Treasury, which really hasn’t cooperated.”

Steven Golubchik, executive vice chairman and president at Newmark (NMRK)’s western region capital markets group, said his team’s transaction volume pipeline is around $5 billion, roughly double what it was a year ago amid more interest rate uncertainty. He noted there is also a big surge in recap deals in the Western U.S. from private equity players and sovereign wealth funds for industrial assets. 

Golubchik said overall stability with interest rates has been a positive for both the acquisition and lending sides of the CRE market. 

“If you think about just real estate in general and real estate investing, a certain component of it is data-driven and the secondary component of it is emotional,” Golubchik said. “We’ve got much more green shoots than we did prior, and we feel like the trajectory is moving forward as opposed to pulling us back, which makes it much easier to make rationalized decisions.” 

Andrew Coen can be reached at acoen@commercialobserver.com