CRE Leaders Weigh In on Complications of Fed Rate Cuts

At the July meeting of the Federal Reserve’s Federal Open Market Committee, the benchmark effective federal funds rate was left unchanged. The FOMC last cut the EFFR, by a quarter point, in November 2024, and as 2025 began, it was expected that the committee would continue to loosen monetary policy. The year is now more than halfway over and there has been no change to the rate, notwithstanding pressure from President Trump. As part of our third annual Summer Leadership Series, we asked C-suite executives to weigh the likelihood and implications of near-term EFFR reductions. Below are insights from Mitchell Hunter, president of Trimont; Taylor Shultz, partner with Porter Kyle; and Jenna Unell, senior managing director, Greystone Servicing Company LLC.

Q: Given the evolving expectations around the Federal Reserve interest rate policy in 2025, do you foresee increasing pressure on the Fed to implement rate reductions? What magnitude of impact could these potential rate cuts have on CRE borrowing costs and overall transaction volume?

Mitchell Hunter: There is a significant amount of pressure on the Fed to implement rate reductions, and it appears to be growing. Though, the Fed assesses the conditions associated with its mandate of price stability and full employment when it considers changes to monetary policy. At this point, the Fed is focused on price stability, as the rate of inflation appears to be accelerating, and tariffs and fiscal stimulus could add further support to price increases. On the other hand, the job market is slowing but remains healthy.

Barring an unforeseen event, my view is that there will be less than two quarter-point rate cuts that many in the market are predicting will occur in 2025. Based on that perspective, my thought is that it will likely spur more lenders to sell non/marginally performing loans and properties. There may be a bit more distressed property entering the market. Additionally, if rates do not decline, there will be less of a chance of cap rate compression which will focus investors and owners on the income portion of the return. Hence, operations will be key to enhancing performance.

At the same point, the Fed acknowledges that the current monetary policy is restrictive (especially compared to the G7), so there is a chance of rate cuts. In the instance that rates are reduced, it is difficult to envision a sustainable healthy economy due to the increased probability of higher inflation.

Taylor Shultz: It is apparent that the Trump administration is placing tremendous pressure on the Fed to begin reducing rates. Reduced interest rates, coupled with a less volatile 10-year Treasury, will definitely reduce borrowing costs and increase transactional velocity. It is difficult for investors to accurately underwrite real estate transactions with a volatile 10-year Treasury, naturally forcing investors to be more conservative in their underwriting. More conservative underwriting and a lack of clarity on what rates will be at the time of a transaction’s closing ultimately leads to a larger “bid-ask” gap between buyers and sellers. When confidence and less volatility in the 10-year Treasury is restored, investor underwriting will become less conservative, allowing would-be sellers in the market to feel more comfortable listing and selling their buildings / communities. 

Jenna Unell: Yes, Jerome Powell is subject to immense political and economic pressure to cut rates. President Trump has publicly called for a 3-point rate cut. This is highly unlikely given the Fed’s preference for more incremental moves and its resistance to political pressures. The Fed has penciled in two cuts by year end starting in September, but Powell has emphasized a “wait and see” approach.

Notwithstanding the market resiliency shown in the first half of this year, uncertainty abounds with respect to Fed policy and the inflationary impacts on the economy. While the imposition of tariffs has been delayed and the magnitude in flux, rates seem to have landed at around an average of 20% and could land at 25% or higher. These are the highest tariffs since the 1900s. We have yet to feel the effect of these tariffs on prices, but most economists predict that, while uncertain on the timing, there will eventually be a passthrough to inflation. Higher tariffs most likely will translate to prices and will reduce real income and consumer spending power. Most business will not continue to have wide enough margins to absorb the cost of tariffs.

Another factor is economic growth. The pace of growth has slowed slightly this year but could be impacted by higher prices. Finally, the impact of adding $20 trillion to the national debt must be considered. While most industry participants expect a rate cut this year, a small chance exists that the Fed will decline to make cuts due to the inflationary pressures and there is greater chance that if there are cuts, they will be modest.

While any rate cut most likely will be welcomed in the real estate sector, there may not be a direct effect on borrowing costs because those are tied more directly to Treasury. The Treasury yields may remain higher due to the same factors described above such as inflation, federal debt and economic uncertainty. Even if rate cuts were to result in lower borrowing costs, those impacts would be minimal. While a reduced rate may in some instances be all that is needed to avoid a distress scenario, it will not solve most of the distress in the current CMBS market. Lenders continue to remain cautious and selective, and underwriting standards remain tight. The office sector is the source of the greatest value declines in this market with values coming in at 50% or less of their values at loan origination. Like the obsolete malls in the previous cycle, a certain percentage of current office product is functionally obsolete and will need to be in some cases re-purposed and in others demolished. Further, there remains a “flight to quality” such that for another segment of older office product, its viability will be reliant on an infusion of capital to provide the aesthetics and amenities required to compete in the market, thus, also reducing its value due to the extensive capital requirements for re-leasing.

The multifamily market is currently benefiting from the lack of affordability in the single-family home market, due in large part to the higher interest rates. Potentially, lower rates could make purchasing a home more affordable and thereby reduce the current robust demand in the rental market or at least lowering expectations of continued rent escalations.