Rate Hikes Beat Cuts For Commercial Property Returns, Study Finds

CRE has spent years focusing on Federal Reserve rate cuts as the key to unlocking the market.

But recent research from Newmark argues that the framing gets causality backward — Fed decisions to lower rates typically coincide with deteriorating labor markets, which historically crush capital returns.

The real driver of commercial real estate performance is stable monetary policy, and with job growth slowing and hot inflation readings potentially set to shake up future Fed decisions, investors need to rethink capital allocation rather than waiting on the Fed.

"It's not that rate cuts mechanically are bad for CRE," Joe Biasi, head of capital markets research at Newmark, told Bisnow. "They're good. Lower rates means that you pay less on your debt. What comes with rate cuts just overwhelms any benefit you get from lower rates." 

When the company evaluated data from 1990 to 2023, CRE returns over the three years following a Fed funds rate cut averaged just 3.0% — compared to 8.3% during periods when rates held steady and 6.9% after hiking periods. The gap held even after accounting for GDP growth and property type across office, multifamily, industrial and retail.

Biasi said investors hoping for rate cuts to bolster activity and returns are actually likely to be met with a slower economy, worse fundamentals and less money chasing deals. 

"When the economy deteriorates, investors start to go risk off, and there's less capital, too, for transaction volume and things like that," Biasi said. "It's fairly counterintuitive at first, but when you think about it, the Fed only cuts rates when the economy is bad."

For much of the past two years, a call for lower rates has been the industry's rallying cry. When the Fed signaled its first rate cut in September 2024 after a hiking cycle to get inflation under control, CRE stakeholders framed it as the moment the industry could get back on track and refinance pre-pandemic debt at more manageable terms. 

The optimism, sources said, was as much psychological as financial, marking a signal that the worst was over.

Investment sales responded in kind, with buyers dropping more than $255B on properties across the four core sectors of multifamily, office, industrial and retail real estate in 2025, a Bisnow analysis found. While not quite the banner year that investment sales saw in 2021, when debt was at historic lows, every quarter in 2025 saw more investment activity than the one before.

Rising inflation may further dampen hopes for rate cuts. The latest inflation readings are running hot, at over double of the Fed’s target, putting rate cuts in doubt as the central bank balances its dual mandate. 

Nine of the 18 Fed governors who submitted projections at the latest FOMC meeting in mid-June forecast at least one rate hike this year, while eight expect rates to remain flat and one projects a 25-basis-point reduction. Inflation spikes have contributed to a stubbornly high 10-year Treasury yield as rates have come down from their peaks over the past couple of years. 

"If you cut rates without being totally convinced about inflation coming in, the market's going to expect that you're going to have to re-raise rates to deal with inflation eventually," Biasi said. "What that leads to is higher long-term yields, because long-term yields bake in the average interest rate over time."  

The framing of low rates as essential to CRE's health may itself signal underlying market anxiety, Moody's Director of Economic Research Ermengarde Jabir said. Historically, real estate has served as a hedge against inflation, with rent growth and the net operating income growth it drives generally outpacing or keeping pace with inflation over time.

Rising wages, operating costs and capital expenditures have squeezed NOI growth as rent growth has slowed, eroding real estate's inflation hedge, Jabir said. 

"That benefit of investing in real estate, I wouldn't say has been lost altogether, but it's definitely dwindled tremendously," Jabir said. 

That erosion is a second reason to stop banking on the Fed for relief. Even without rate cuts as a backstop, the longstanding cushion that real estate offered to investors against a bad economy has thinned. 

If investors no longer count on Fed policy to rescue underperforming assets, Biasi said, that should change how they underwrite deals in the first place. Rate pain is relative to recent history rather than any fixed benchmark, he said. The 10-year Treasury may sit below its 50-year average, but it's still above its 10-year average.

That distinction is especially relevant for investors buying into narrow cap rate spreads, such as in multifamily and industrial, who often count on falling rates to bail out returns that tight spreads alone can't support, Biasi said. Instead, investors should buy properties where they can raise rents rather than banking on Fed rate relief.

"If you're buying at narrow cap rate spreads, there's nothing wrong with that, but you should be betting on really strong rent growth and not interest rates to come save you," Biasi said. 

Kayla Carmichael contributed reporting.