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What Does the Fed Rate Cut Mean for Commercial Real Estate?

The Fed didn’t disappoint yesterday with a 50 bps rate cut and the markets responded today with a new high for the Dow of 42,000. What does this mean for CRE?

Slight Debt Service Relief Deals that have been generating little or no cashflow after debt service due to floating rate loans may see some level of relief. While 50 bps is a relatively large single rate cut, rates overall are still much higher than they were before the rate hiking cycle started. The relief will be meaningful for deals that are on the margins of cashflow generation but will not be very helpful for deals that are deeply underwater.

Increased Refinances Similar to cashflow relief, deals that have been trying to refinance higher cost debt but were marginally outside of the underwriting box on debt yield and debt service metrics may be able to execute a refinance with new bridge or term debt. But again, deals that are deeply underwater will still be unable to refinance their existing high-cost debt.

I expect there will be an uptick in debt financing between now and the end of the year given these scenarios but not a huge increase. Equity will still remain mostly sidelined with the exception of highly distressed/opportunistic deals. Equity investors are also waiting to get past the election and inauguration so I wouldn’t expect a major increase in investment activity until next year.

Long-Term: The Fed may do another 50 bps cut before the end of the year which combined with election uncertainty being past could encourage a stronger investment climate for 2025. That said, I don’t think rates will go down much further for some time to come. The Fed only influences demand side inflation and will be watching closely for any increases which would quickly lead back to rate hikes. Separately, the world is experiencing many supply-side inflationary pressures such as the restructuring of global supply chains, geopolitical conflict and rapidly aging demographics in the developed world. The Fed will be unlikely to do major rate cuts while these inflationary pressures continue to grow.

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