In a move widely anticipated by the financial markets, the Federal Reserve has lowered the federal funds rate by 0.5%, marking a long awaited and pivotal moment for the commercial real estate (CRE) market. After months of expectation, the rate cut has finally arrived, and many investors are sizing up their options and are ready to leave the sidelines.

This drop is the first time officials have trimmed rates in over four years, signaling a significant shift in policy. Fed Chair Jerome Powell emphasized the need to support the economy as it strives to meet the central bank’s 2% inflation target.¹ Here’s what the move may mean for CRE investors.

A surge in market activity

The Fed’s rate cut is expected to trigger a revival in CRE market activity. As borrowing costs are anticipated to decline, financing new deals and projects will begin to be more attractive, paving the way for increased transaction activity and investment, as well as improving acquisition volumes and reviving competition for properties.

This is particularly true for sectors like multifamily housing, where high cap rates previously stalled transactions.

The construction industry also stands to benefit from the decision. Lower interest rates make financing more accessible, allowing developers to move forward with projects that had been on hold. This increase in development could create new opportunities for investors at lower rates.

More favorable cap rates

Cap rates, which have risen by approximately 2.0% since the onset of the Fed’s tightening cycle, are now poised to start to decline as interest rates begin to fall. In further good news for CRE investors, cap rate spreads to BBB bonds are already adjusting for the better.²

Since the end of Q2, BBB bond yields have fallen about 0.6 percentage points² as bonds have rallied, while cap rates have remained relatively stable. This has made commercial real estate look more attractive to investors, with no real estate asset classes experiencing negative spreads by the end of Q2.² As a result, the potential maturation and expansion of commercial real estate as an investment class should lower spreads compared to historical norms² due to the wider availability of capital and increased competition.

The Fed’s interest rate cut marks the beginning of the next chapter for commercial real estate investors. CRE investors are likely to see the full impact of the Fed’s rate cuts as we move into 2025, with borrowing costs continuing to ease and capital becoming more accessible. We will also likely see increased competition for properties, particularly in high-demand sectors like multifamily housing and industrial. As these favorable conditions persist, we expect heightened transaction activity and a revitalized construction sector that investors could potentially take advantage of.

iintoo continues to seek attractive opportunities for our investors, by leveraging existing relationships with sponsors and institutions to source deals, utilizing our dedicated team of real estate experts and financial analysts. Log in to our platform to see detailed information on our current offerings. 

1. Time: Jerome Powell Says the ‘Time Has Come’ for the Fed Begin Reducing Interest Rates
2. Colliers: Quick Hits: Real Estate Looks Attractive