In late October, the Federal Reserve opted to make its second 25-basis-point cut this year on the Effective Federal Funds Rate (EFFR). The action brought the overnight rate to 3.75% to 4%. The news has led many to speculate that this action will signal an increase in commercial real estate deal flow.

However, Marcus & Millichap Senior Vice President John Chang pointed out that there are other variables when it comes to overall lower interest rates. “Lending rates over the last year have been driven by more than just the Fed rate cuts,” Chang said in a recently released Marcus & Millichap video entitled “CRE Rates Trend Lower.”

Here are some of the factors that have put downward pressure on interest rates.

Banks are Changing Course

Chang said that banks weren’t too active in the CRE space during 2024 because “they were busy repairing their balance sheets and mitigating commercial real estate default risk.” The institutions spent time clearing off riskier loans and improving deposits.

But that seems to be in the past. “It looks like banks may face a more lenient regulatory environment that requires lower reserves,” Chang explained. “Banks are becoming increasingly active once again.”

Private Lending Capital: Still Available

Debt funds and other private capital sources have been stepping into the gap left by traditional lenders. Chang pointed out that investment funds moved their focus from property acquisition to investor financing.

Private lenders typically don’t require personal guarantees and focus on short-term bridge loans to cover funding gaps, like refinancing properties with maturing debt or renovating assets. During the first three quarters of 2025, private lenders raised about $24 billion of capital—a $13 billion increase from the previous year.

Said Chang: “This increased liquidity has helped put downward pressure on commercial real estate lending rates.”

Optimism and the Fed

The outlook suggests that the Fed will continue lowering rates in 2026. As a result, “fewer lenders have been keeping their lending spreads high, due to the combination of increased lending liquidity and expectations of relatively stable or modestly falling Federal Reserve interest rates,” Chang said. Interest rates are also based on the sponsor’s experience, asset type, location, and other factors, he added.

Will it Continue?

Though interest rates have declined year-over-year, they’re still higher than where they were in 2021-2022. Furthermore, “no one knows how long the slower commercial real estate interest rate environment will last,” Chang acknowledged.

At his most recent press conference, Fed Chairman Jerome Powell said that a December rate cut isn’t “a foregone conclusion.” Additionally, Chang commented that the chance of additional reductions in 2026 has moderated. As such, “we’re still in a fluid lending landscape, and there are a lot of forces in play that could move interest rates up or down,” he added.