Fed Pauses Interest Rates as CRE Market Preps for December Hike 

The Federal Reserve gave the commercial real estate industry a momentary reprieve Wednesday with an interest rate hold six weeks after hiking short-term borrowing costs for the first time since 2023, but the market is bracing for another rate hike before the end of the year.

In a 10-2 vote, the Federal Reserve’s Federal Open Market Committee (FOMC) maintained its benchmark interest rate at between 3.75 percent and 4 percent despite inflation remaining well above its 2 percent target.

“On the employment side of the Fed’s dual mandate conditions are quite positive, and yet Americans of course are still dealing with inflation that has been running above the committee’s objective for close to six years,” Fed Chair Kevin Warsh said in a post-meeting press conference. “It’s our responsibility to get inflation down.” 

Wednesday’s Fed meeting came on the heels of the U.S. Department of Labor releasing its latest inflation figures on Oct. 14 showing consumer prices rose 3.7 percent in September compared to the year-ago period, marking an increase from a 3.4 percent inflation reading in August. 

At the Sept. 16 Fed meeting in which the FOMC unanimously voted for a quarter-point hike, 16 of 18 committee members indicated they would support one more rate hike this year based on the central bank’s updated “dot plot” matrix. 

The two dissenting votes Wednesday were Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack, who both wanted a quarter-point increase. It marked the first dissenting vote for Cook, whom President Joe Biden appointed in 2022 and President Donald Trump has sought to remove for alleged mortgage fraud. 

Ian Ross, founder and managing principal at SomeraRoad, said uncertainty over the levels that interest rates will reach in late 2026 and heading into 2027 has slowed transaction volume in the CRE investment sales market.

“We’re late enough in the year and conditions are uncertain enough that most people just put their pencils down,” Ross said. “The market just needs a signal of stability and a path so participants have a stable footing to act from.”

Ross noted that the many of the transactions moving forward this fall tend to be cases in which sellers need to unload assets due to distress, which provides opportunities for “bargain hunters” since so few market participants are in the game. He said SomeraRoad and other sponsors that aren’t in need of liquidity and are waiting to sell assets.

Jay Neveloff, partner and chair of U.S. real estate for the law firm HSF Kramer, has not seen a slowdown in deal activity in the last two months with lender clients still looking to deploy capital. Neveloff said the commercial mortgage-backed securities market has been more negatively affected by elevated interest rates, but private lenders he works with remain active.

“The clients that we deal with are looking at underwriting standards, and they’re focused on that more than a minor change in interest rates,” Neveloff said. 

In advance of the Fed’s September meeting, the CRE market received early signs of rising long-term interest rates when the 10-Year Treasury yield crossed the 5 percent threshold and hit its highest level since 2007. The U.S. Treasury yield closed at 4.992 percent at the close of trading on Oct 27.

Patrick McGlohn, senior managing director for Berkadia’s mortgage banking platform, said changing expectations for the Fed funds rate in late 2026 coupled with the steady rise of Treasury yields in September has created increased challenges when penciling deals that were already in the pipeline. He said the dynamic has also caused a “valuation reset” for internal loan-to-value metrics used by lenders.

“We’ve seen a little bit of a jolt from the Treasury run-up and what that’s caused from a credit credit stance from lenders,” McGlohn said. “It has also driven higher cap costs, so it’s been a little bit of a shock to the system over the past four or five weeks.” 

Aaron Terrazas, an independent economist and guest lecturer at University of Washington, said CRE performance in the higher-for-longer interest rate environment has varied greatly based on property sectors, with some industrial proving to be “robust” nationally and multifamily confronting oversupply issues in the Sun Belt. 

Terrazas said the economy has many “yellow lights,” but overall the CRE market has held up in the last couple years amid concerns about maturity walls that have persisted.

“Anyone hoping to turn over debt over the past two years hasn’t been bloodless, and It hasn’t been a disaster, either,” Terrazas said. “There’s certainly been an uptick in delinquencies, but it’s hard to say that it’s spilled over broadly to the rest of the economy and prices have adjusted. So investors still have cash on hand, but they’re looking for the right valuations.”  

Warsh announced at his press conference Wednesday that the Fed will scale back the number of rate-setting meetings per year with one its eight scheduled in 2027  set aside for “broad monetary policy strategy.” He said in 2028 the central bank is planning six meetings dedicated to establishing the federal funds rate and two for larger economic issues.

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