Federal Reserve Cuts Interest Rates: A New Opportunity for CRE Investors

On November 7, 2024, the Federal Reserve’s Federal Open Market Committee (FOMC) made a strategic move by reducing the benchmark federal funds rate by another 25 basis points. This latest rate cut has significant implications for various aspects of the commercial real estate (CRE) market, particularly for those involved in short-term loans, such as bridge and construction financing, as well as longer-term commercial mortgages.

Short-term rates have a more immediate impact on financing options for developers, while long-term rates play a key role in shaping the cost of longer-term real estate investments. The Fed's decision underscores their continued focus on balancing the economy by targeting 2% inflation while striving for maximum employment. Though October’s employment numbers came in lower than expected, it's important to note that many areas, particularly in the East, are still recovering from the aftermath of Hurricanes Helene and Milton, which temporarily affected job markets.

Despite this, the broader economic outlook remains positive. "With consumers feeling more optimistic and public markets reaching new highs, the combination of strong economic fundamentals and declining interest rates could create an ideal backdrop for CRE investments in the medium term," said Ryan Severiono, Chief Economist and Head of U.S. Research at BGO. “While risks persist, the economy’s momentum appears to be strong enough to navigate them.”

Looking ahead to 2025, there’s potential for the pace of rate cuts to slow, as President-elect Trump’s growth-focused policies may introduce upward pressure on interest rates. These inflation-driven policies could help maintain a higher interest rate environment in the U.S. for the next several years.

For real estate investors and developers, these market dynamics present both challenges and opportunities. With interest rates still relatively low compared to historical norms, and the potential for a solid economic foundation moving forward, now could be an ideal time to evaluate investment strategies and position portfolios for the medium to long term.

Written by Shelly Branscom