'Fresh Air' Or Just More Smoke? What The Rate Cut Means For CRE

The Federal Reserve’s decision to cut interest rates by 25 basis points Wednesday was widely expected, but the first rate cut since 2024 was still closely watched by the commercial real estate industry as a guidepost for a market in recovery.

The CRE market hasn’t been waiting for the Fed — transaction volume was up 15% year-over-year in the first half — but investors have nonetheless been anxiously watching for a sign that the central bank would relent in its fight against inflation. Wednesday's decision was celebrated across executive suites as grease for the wheels.

“The single rate cut is not going to dramatically change the valuations on properties and things like that, but it will affect movement and momentum in the marketplace,” said Courtney Stanford, managing director at SVN Dunn Commercial. “Anytime you can change even a small lever, it helps people feel more confidence in their investments.”

The shift in Fed policy reflects a shift in the central bank’s view of the country’s overall economic health. A major revision to jobs data this month erased 911,000 new positions from the federal count and hinted at weakness in the labor market that hadn’t been factored into Fed policymaking. 

“In the near term, risks to inflation are tilted to the upside and risk to employment to the downside, a challenging situation,” Federal Reserve Chair Jerome Powell said during a press conference Wednesday. 

The weak jobs data helped fuel anticipation of rate relief among investors, which has helped push bond yields down and given some investors more confidence that the Fed was preparing to kick off the next cycle of loosening monetary policy.

“The Fed’s 25 basis point cut reinforces what the market had already started anticipating, and in many ways, pricing and activity had already begun to reflect it,” Dan Berman, U.S. real estate managing partner at law firm Herbert Smith Freehills Kramer, said in an email. 

Even if widely expected, Avison Young CEO Mark Rose said the Fed’s decision provides some solid ground in what has been a murky economic outlook.

“While a 25-basis-point reduction may not materially transform the landscape overnight, it meaningfully improves investor psychology, underwriting conditions, and the cost of capital — key ingredients for renewed momentum,” Rose said in a statement.

He said the office market stands to be one of the biggest winners of the Fed’s policy shift.

“The office sector, particularly Class A- and B- properties that have experienced significant value adjustments, stands to benefit most,” Rose said. “Lower interest rates improve the economics of both development and acquisition, unlocking pathways to capital and encouraging occupiers and investors alike.” 

It will also help some owners on the margin who have been barely squeaking by as operational costs increase along with interest rates, Impex Capital Group CEO Ash Shah said. Loan delinquency rates have climbed through 2025, and a small reduction to borrowing costs will shift the financials into the black for at least some of the properties. 

“A lot of sponsors and other commercial real estate players out there who really have been severely beaten up for the last two and a half years will, I think, smell a little bit of fresh air,” Shah said.

The multifamily sector, which relies on more short-term debt, is especially sensitive to changes in the federal funds rate and has been squeezed by rising operating costs and declining rent growth this year as a wave of new construction comes online. 

The cut could have wide-ranging effects across CRE, including lowering financing costs, compressing cap rates and enabling ground-up development to pencil better, Neology Group CEO Lissette Calderon said.

While the industry would have preferred a larger cut, the first move is a confidence boost that the central bank is moving in the right direction, she said. 

CBRE forecasts that lower borrowing costs will boost CRE investment volume by about 15% this year, up from an earlier projection of 10%.

“​​It was long overdue,” Calderon said. 

But the impact of the small rate reduction won’t fix all of CRE’s difficulties navigating a tricky market, BGO Chief Economist and Head of U.S. Research Ryan Severino said in an email. 

“While one rate cut will likely prove no panacea for commercial real estate, especially since CRE is more impacted by the long end of the yield curve, it is a start,” Severino said.  

Investors had already priced most of Wednesday’s interest rate cut into markets, pushing down bonds and driving up equities. While the federal funds rate helps peg the cost of all types of short-term debt, it has less of a direct impact on the other side of the yield curve. 

Still, the cycle of cheap debt that followed the Great Recession has made CRE investors too reliant on interest rate fluctuations, Paragon Commercial Group principal and co-founder Jim Dillavou said in an email. 

“The commercial real estate industry has become unhealthfully fixated on the Federal Reserve and timing the market,” Dillavou said. “Short-term industry euphoria comes with an important macroeconomic caveat: cheaper capital could increase inflationary pressure triggering a ‘boomerang’ effect whereby lenders are forced to quickly tighten once again.” 

David Scherer, co-CEO at Origin Investments, said the Fed’s decision to cut rates may be helpful for investors, but it is also a warning sign. Downward momentum on interest rates is problematic for the sector when it is driven by a weakening economy, higher unemployment and slower wage growth. 

“You never get it all, and we don’t really have a choice in the matter, but a lot of people in real estate would choose less movement in interest rates and a stable or thriving economy over more declines to prop up a weak economy,” Scherer said.