With the Federal Reserve announcing its first interest rate reduction since 2020, we asked our SVP of Research and Market Forecasting, Steve Triolet, for his take from the CRE perspective.

“The long-awaited rate cut by the Federal Reserve signals a major shift in the commercial real estate market. This move, which reduces the cost of borrowing, can have wide-reaching effects across various asset classes and market segments, influencing everything from property valuations to investment strategies. As borrowing costs drop, the dynamics of commercial real estate are likely to evolve in several key ways.

 

One of the most immediate impacts of a rate cut is the reduction in the cost of financing. Lower interest rates mean it becomes cheaper for investors and developers to take out loans for new projects or refinance existing debt. This could lead to a surge in borrowing and refinancing activity, particularly in capital-intensive sectors like office, industrial, retail and multifamily properties. As the cost of capital decreases, property owners will see improved cash flows due to reduced monthly debt service payments, making real estate investments more attractive.

 

With the drop in interest rates, property valuations are likely to rise as investors adjust to the new financial environment. Historically, lower interest rates have led to cap rate compression, meaning investors are willing to accept lower yields on their investments, which in turn drives up property values. This effect may be particularly pronounced in core markets, where competition for high-quality assets is already intense. The lower cost of borrowing could encourage more investors to move capital into commercial real estate, particularly as a hedge against inflation and as an alternative to lower-yielding investments like bonds.

 

Real estate investment trusts (REITs) are also poised to benefit from the rate cut. As REITs often rely on debt financing to acquire and develop properties, lower interest rates can enhance their profitability and boost stock prices. Investors seeking income-generating assets may find REITs more appealing in this environment, further increasing demand for real estate-linked investments. The positive sentiment in the stock market, combined with stronger cash flows for property owners, could bolster the overall attractiveness of commercial real estate as an asset class.

 

However, not all areas of the market will respond equally. While core markets and prime properties are likely to see increased demand and rising valuations, secondary and tertiary markets may experience mixed results. In periods of economic uncertainty—often the backdrop for rate cuts—investors tend to favor safer, more stable markets. As a result, speculative developments or investments in emerging markets could struggle to attract financing or attention. Investors may prioritize established asset classes, such as Class A office properties, industrial warehouses, and multifamily developments in major cities, while being more cautious with riskier ventures.

 

The overall impact of the Federal Reserve’s rate cut will depend largely on broader economic conditions and investor sentiment. If the cut is seen as a preemptive measure to address slowing economic growth, it could lead to a flight to safety in commercial real estate, with investors favoring stable, lower-risk properties. On the other hand, if the rate cut sparks confidence in future growth, it could fuel a new wave of development and investment across the sector. Either way, the commercial real estate market is entering a new phase, where lower borrowing costs and shifting investor strategies will play a central role in shaping the landscape.”