A Quarter-Point Cut; What Next? – Sept. 22, 2025

The Federal Reserve’s forward path and its implications for commercial real estate aren’t clear yet

At its September meeting, the Federal Reserve’s Federal Open Market Committee (FOMC) began moving toward a less restrictive monetary policy. The quarter-point reduction in the benchmark federal funds rate had been widely expected; in fact, it would have been surprising if the FOMC didn’t start cutting rates after a year of holding them steady. 

Less clear at the moment are the path that the FOMC will take in the coming months and the long-term impact on commercial real estate borrowing and sale transactions. Jim Dillavou, principal and co-founder of Paragon Commercial Group, noted that the 25-basis-point cut “arrives with a big caveat for commercial real estate. As a result of the federal reserve rate increases of 520 bps between March 2022 and July 2023, the commercial real estate industry has become unhealthfully fixated on the Federal Reserve and timing the market.”  

The narrative set up by this emphasis on the Fed’s actions is as follows: “lower rates translate to lower borrowing costs, which triggers more acquisitions, refinancings, transactions and maybe even some cap rate compression—which is good for the overall industry,” Dillavou continued.  

“This is all true, but 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 or, in a worst-case scenario, forces the Fed to reverse the anticipated series of interest rate cuts. It’s a real estate investment tightrope walk that I don’t advise anyone to attempt to walk.” 

As for the immediate impact of the 25-bp rate cut per se, Slatt Capital CEO Daniel Friedeberg and others held that it would be minimal. “This was already baked into the Treasury market, and most investors make decisions in advance of the cut based on expectations,” said Friedeberg. 

That being said, expectations of a rate cut have already led to an increase in deal flow, he added. At the same time, the CRE industry has adapted to the higher-for-longer rate environment, pointed out Joe Biasi, head of commercial capital markets research at Newmark. 

“While higher rates have caused issues in the commercial real estate market, credit supply has already begun to recover as relatively steady five- and 10-year Treasury yields have forced a lot of current owners to stop waiting for rates to come down,” Biasi said. “Year-to-date debt origination volume is 49% higher compared to 2024, with banks, life insurance companies, and private lenders’ activity all increasing.  

“While lower rates both at the long and short end of the curve would encourage greater activity, market function has become less rate sensitive on the margin compared to past years,” he added. 

Even so, the FOMC’s rate reduction prompted CBRE to upsize its projection of 2025’s year-over-year improvement in transaction volume from 10% to 15%. The firm also sees limited cap rate compression and moderate growth in leasing this year and next, with renewals comprising a big share of leasing activity. 

And the public markets’ immediate response to the rate cut serves as a bellwether, said Rich Hill, global head of real estate strategy & research at Principal Asset Management. He noted that share prices for listed REITs rose by an average of 1.25% after Fed Chair Jerome Powell announced the central bank’s decision.  

“As listed REITs often serve as leading indicators, this rally supports our view that the worst is behind the private CRE market,” said Hill. “We continue to expect unlevered total returns of 5–6% in 2025, driven primarily by income.” 

However, Biasi warned that “the vast majority of commercial real estate loans are maturing into a higher interest rate environment than they were originated at. Roughly $2 trillion in commercial real estate loans are expected to mature by the end of 2027, with roughly a quarter expected to have some issues. It would take significant reductions in long-term rates to resolve vintage-based undercapitalization issues beyond what the Federal Reserve is likely to deliver.” 

And Eric L. Enloe, MAI, CRE, FRICS, senior managing director at Partner Valuation Advisors, cited the tenuous circumstances behind last week’s rate cut. “This reduction of 25 basis points was an intersection of the job market getting really soft and inflation concerns,” he said. “The reason not to cut the federal funds rate was related to inflation; however, it appears that the Fed felt that the soft job market outweighed the inflation concern. Time will tell if this was the correct move or not.”