[co-author: Riley Veader]
The Federal Reserve (the “Fed”) continues to implement policies aimed at stimulating the economy, including lowering the federal interest rate by 25 basis points in early December (for a combined decrease of 100 points since September 2024). While the U.S economy continues to soldier through a prolonged period of inflation, efforts such as the Fed’s easing of interest rates suggest that things could be shifting in a direction more favorable to borrowers, both producers and consumers. Inflation peaked at an alarming 9.1% in 2022, with the Fed setting a target of 2% in announcing its efforts to address sky-high inflation. As of December 2024, inflation has fallen to a rate of 2.7% and the federal interest rate to 4.25-4.5%. While the pace of the decrease has slowed, Fed Chairman Jerome Powell still expects to reach the 2% goal, with the question of timing for reaching that target rate remaining an elusive detail.
The Fed’s 2025 Outlook
As an industry reliant on debt financing, commercial real estate is expected to see the benefits of interest rate cuts at some point in 2025, though market participants will have to wait to see what form (and to what extent) these benefits take due to the federal interest rate still being markedly higher than it was pre-pandemic. In recognition of this reality, the Fed recently updated its projections for 2025, expecting the interest rate to reach 3.75-4% by the end of 2025. While this is a slower rate of decrease than many would prefer, it reflects the careful decision making by the Fed not to upset an already delicate economic situation.
Though substantial relief may be delayed, the interest cuts support the potential of an optimistic future for the commercial real estate industry. With the lower cost of capital, more transactional activity is expected, allowing for more large-scale property acquisitions than in previous years at more stabilized prices. While the availability of such capital is uncertain, lower financing costs encourage bolder developments which should help boost deal flow in the coming years.
Potential Implications of a New Administration
While the new year provides a sense of optimism within the market, proposed tax cuts, increased tariffs and major immigration reform by the new presidential administration could result in the Fed exercising more caution in the coming months, as evidenced by their 2025 projections. Due to the uncertain nature of future policy, the Fed will analyze a number of issues before providing relief, resulting in a period of what appears to be near stagnation. While this is by no means the “quick fix” some are looking for, it still suggests that efforts are succeeding and that a boom in commercial real estate dealmaking is just around the corner.
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