Fed's Cut Is No 'Magic Fix,' But It Raises The Curtain On CRE's Next Act

It was all but inevitable last week that the Federal Reserve would make its first rate cut of the year, and the decision came as no surprise to the commercial real estate sector. Still, after holding its collective breath for nine months, the industry let out a sigh of relief at the decision.

Interest rates and the cost of capital have been the looming giant in the heads of commercial real estate decision-makers this year, and transaction volumes had already started to tick up ahead of the widely expected 25-basis-point cut to the federal funds rate.

“Commercial real estate is so hinged to interest rates, and this is definitely a step in the right direction. Psychologically, it's going to put things in the right perspective,“ said Ash Shah, CEO of Houston-based Impex Capital Group. 

The Fed’s first rate cut of the year hasn’t suddenly slashed the cost of capital, but investors, analysts, brokers and owners who spoke to Bisnow said it did something more important: It set expectations that the central bank was ready to start easing monetary policy at a stable rate. 

Before this month’s meeting, Fed Chair Jerome Powell and the other members of the Federal Open Market Committee kept its benchmark rate flat — despite intense political pressure calling for cuts — because of stubbornly high inflation and a belief that the job market was in a strong position. 

But recent revisions to employment data erased nearly a million jobs from the U.S. economy, as inflation accelerated to 2.9%. 

Faced with divergent pressure on the Fed’s dual mandate of maximum employment and price stability, Powell signalled that the central bank was willing to defend the jobs market even as inflation runs above target. 

The rate cut is “more meaningful in that this was signaled, it was delivered, and there is a signal now that there is more to come, which means short-term rates are going to continue to trend down,” LaSalle Investment Management Managing Director Allan Swaringen said.

The modest reduction in borrowing costs will help properties on the margins, with balance sheets where a quarter-point change in debt service can make a difference. But, more importantly, the decision signaled that the Fed wasn’t singularly focused on inflation.

Fed governors also released new forecasts as part of Wednesday’s meeting that signaled that a majority of the central bank’s members saw potential for an additional 50 bps in rate reductions this year. 

“As expectations build for additional cuts totaling up to a full percentage point, the industry is poised to accelerate its recovery from trough to peak,” Avison Young CEO Mark Rose said in a statement. “Ultimately, this is not a magic fix, but a vital step forward—one that reinforces fundamentals, strengthens financial viability, and restores the confidence needed to get back to business.”

The shift in Fed policy and strong occupier fundamentals also led CBRE to release updated projections for year-end transaction volumes after the Fed’s meeting. The brokerage giant now projects U.S. investment volume to total $438B in 2025, which would be a 15% year-over-year boost and five percentage points higher than its midyear forecast. 

Activity in the commercial real estate market has trended upward this year, but the pace is accelerating as the sector begins to shed pandemic-era negativity around office utilization, the resiliency of retail and multifamily’s prospects for rent growth. 

A more predictable rate environment — there’s a more than 90% likelihood of another 25-basis-point cut at the Fed’s next meeting in October, according to CME Group’s FedWatch tool — could help lenders and owners cut into the mountain of debt where refinancings, sales and workouts have been delayed, especially for larger loans. 

“A quarter of a percent is probably not going to take something that's severely underwater and now enable it to be refinanced,” said Noah Bilenker, a partner in Goodwin’s Real Estate group. “But when the denominator is large enough, they can have meaningful impacts.” 

But there are only so many massive properties, and loan delinquencies across all types of real estate debt have climbed in 2025. CMBS delinquencies reached 7.3% in August, representing $44B in debt. Commercial banks’ charge-off and delinquency rates for commercial loans have been climbing since 2022 and sit at a decade-high 1.57%. 

The yield on 10-year Treasury bonds, used to price all sorts of real estate debt, fell in early September ahead of the Fed’s expected rate cut. But it has climbed higher since the Fed meeting, which likely reflects capitulation from a subset of investors that rates are likely to remain significantly higher than the 15 years of cheap debt that followed the Global Financial Crisis, said Jim Costello, executive director at MSCI Research. 

It was also a reminder that the Fed’s benchmark rate has limited reach on the longer end of the yield curve, he said on Bisnow’s First Draft Live livestream Friday. 

“There was a lot of optimism, there was a lot of hope that it would both be a bigger cut and it would have more of an impact [on longer-dated Treasury bonds]. In both cases, it turned out differently,” Costello said. 

Refinancing many of the $957B in commercial real estate loans set to mature this year will likely continue to be a challenge, Commercial Real Estate Finance Council CEO Lisa Pendergast said.

A healthy, performing asset that secured its mortgage during the pandemic can still face challenges from today’s significantly higher debt costs. Loans that were signed at 4% are resetting closer to 6.5% or 7%, and it would take significantly deeper cuts from the Fed to help push mortgage rates back into that realm, Pendergast said.

“We're not there,” Pendergast said. “And even if they were to ease some, that's a heck of a lot of easing.”

That’s kept the incentive alive for owners of high-quality, performing assets to look for short-term solutions, and they’ve found willing lenders in both the public and private market to keep extending maturities, Pendergast said.

“At some point, though, there's a reckoning. You're not going to extend them into eternity,” she said. 

CBRE forecasts that 10-year Treasury yields will stay roughly in their current range through the end of the year, which offers limited upside to values from rate reductions. Instead, the brokerage projects the next wave of value to be unlocked through property performance. 

“We are not predicting a giant lift in valuations like you saw after the Covid bounce — with all the stimulus and all the liquidity that was pumped into the economy and up-to-zero interest rates,” said Swaringen, who is also CEO of JLL Income Property Trust. 

“Our perspective is that the valuation recovery is going to play out longer based on income growth and not by cap rate compression,” he said. “I don’t think 25 basis points has a meaningful impact on property valuations.”