The U.S. Federal Reserve is expected to cut its key interest rate Wednesday, and commercial real estate professionals say that while the move could kick-start some dealmaking, it won’t automatically reshape property investment or project values.
While considered by some dealmakers to be helpful, a cut’s effect, they say, will be limited partly because lowering the cost to borrow is only one aspect of project financing. In some cases, a rate reduction already has been priced into potential deals because Federal Reserve Chairman Jerome Powell has signaled a potential cut is on the way, property professionals told CoStar News. President Donald Trump has also pressured Powell to make that happen.
Even if a cut of only 25 basis points happens Wednesday, as some economists predict, supporters of a larger cut say it would be warranted to stir a weakening labor market. Others have pushed for a more cautious approach to avoid driving up inflation.
Still, “a cut can be seen as nothing but positive,” Avison Young CEO and Board Chair Mark Rose told CoStar News in an interview. “Cost of capital to build, if you use financing, which most do, will come down. That’s a good thing.”
Overall, Rose said, the move would create stability and confidence to invest and build. The industry is still working through post-pandemic challenges in the form of reduced office demand and as the overall economy reacts to effects from tariffs.
The deliberations by the central bank follow an extraordinary several weeks, a period that included Trump and the head of an independent housing finance agency repeatedly called on the Fed to lower rates. The timespan also included accusations that a Fed member may have been involved in mortgage fraud and allegations that Powell may have mismanaged the central bank’s headquarters renovation in Washington, D.C.; in both cases, the accusations were disputed.
“‘Too Late’ MUST CUT INTEREST RATES, NOW, AND BIGGER THAN HE HAD IN MIND. HOUSING WILL SOAR!!!,” Trump posted on social media this week, referring to Powell.
Last cut in December
The benchmark rate has remained unchanged at the current target range of 4.25% to 4.5% since December, following three cuts last year that shaved 1 percentage point off the rate. Rates have remained elevated since the Fed hiked them 11 times in 2022 and 2023 to counter inflation in the wake of the pandemic.
The Fed has held firm in its stance to keep steady the federal funds rate, a tool it uses to influence economic activity, given unpredictability from tariffs. Still, while a rate cut might stimulate activity, it does not indicate a direct cause-and-effect to capitalization rates, meaning it wouldn’t necessarily change the expected rate of return of an investment property.
Assuming the Fed gives the guidance that’s expected, cuts rates and “signals more easing ahead ... this is really a story about expectations playing out,” Rebecca Rockey, Cushman & Wakefield’s deputy chief economist, told CoStar News via email. “We should not see a lot change unless Chair Powell sets a different tone in forward guidance.”
If the collective Fed board members elect to cut the rate, the shift in strategy could offer more of an indication of what is to come, some executives say.
“If rates come back down, I think it will help evaluations as pricing will come back down on industrial and multifamily,” Gerry Trainor, who directs investment sales and real estate investment banking activities in the mid-Atlantic region for Transwestern, told CoStar News in an interview. He noted it would also help stabilize pricing on office properties.
Chad Littell, CoStar Group’s national director of capital markets analytics, agreed that an interest cut could restore confidence that it’s time to move forward.
“In short, should the Fed cut its policy rate soon, as is widely expected, the move will provide a tailwind, easing pressure on short-term borrowers and improving investor sentiment,” Littell told CoStar News via email. “However, valuations are unlikely to move higher on a few rate cuts alone. For that, a return of above-trend rent growth and a strong appetite for new investment will be needed to shift investor time preference once again, when buyers will pay now for the opportunity to generate higher incomes later.”
Impact of inflation
There are several reasons the Fed would choose to lower the rate, but after a monthslong standstill, Powell acknowledged at the end of August during a speech in Jackson Hole, Wyoming, that inflation has come down a great deal from its post-pandemic highs. Higher inflation can increase financing and operating costs and decrease commercial real estate values.
Regardless of the impetus, real estate professionals said a decision to lower borrowing costs could help address distress seen across commercial property types.
Commercial real estate markets across the country are still recovering from how the pandemic altered space needs and generally resulted in lower demand for office space. Some office buildings are still trading at a fraction of their previous values, Rose said.
Markets are also continuing to handle confusion and delays caused by tariff policies. The Fed “clearly is not out of the woods with respect to the inflationary impulse of tariffs,” Cushman’s Rockey said.
It can be difficult to disentangle the rate impact from other forces, and each asset type has its own storyline. But real estate executives said the high-interest-rate environment caused some capital-intensive projects to be put on hold or killed in the past year from Pennsylvania to Vermont to Virginia.
“Higher rates had an immediate dampening effect on transaction volumes,” Rockey said.
Tariffs take toll
Shifting tariff policies and persistently high interest rates took a toll on industrial real estate activity, with only 27 million square feet absorbed in the first half of the year, according to NAIOP, the commercial real estate development association, in its August Industrial Space Demand Forecast.
Demand shrank by 11.3 million square feet in the second quarter, the first quarterly decline since 2010, the trade group said.
“Falling rates and greater clarity on tariffs could reduce uncertainty and spur greater demand for industrial space, leading to a return to positive absorption in early 2026,” according to the NAIOP report.
Meanwhile, the multifamily market is characterized by two types of investors — those comfortable in the current environment that are ready to act, and those taking a more conservative approach, according to a market update last month from JPMorgan Chase.
“There is more acquisition activity — people have more conviction making investments and purchasing assets,” Kurt Stuart, co-head of commercial term lending at JPMorgan Chase, wrote in that outlook.
A combination of economic uncertainty, high interest rates and increasing construction costs caused apartment starts to fall 35.1% between the first quarter of 2024 and the first quarter of this year, the National Multifamily Housing Council reported, citing CoStar data.