The last Fed interest rate cut of 2024 - Implications for US commercial real estate

Fed announces 25 basis point cut to US interest rates

Today’s 25 basis point reduction to US interest rates is welcomed by the markets and remains in line with investor expectations. However, the market’s focus will turn quickly to the Federal Reserve’s (Fed’s) forward path and what that might mean through next year.

As the US economy continues to contend with stubborn inflation, 2025 may introduce new challenges to the landscape in the form of changing policy (trade, immigration, regulatory burden, etc.) ushered in by the new White House administration. Earlier this year, there was a notable shift by markets and the Fed away from being hyper-focused on inflation and towards the labor market. However, as progress on taming inflation appears to have stalled or slowed and policy uncertainty grows, inflation is making its way back into the spotlight.

Has inflation progress stalled?

Having cut the benchmark Federal Funds rate by a combined 100 basis points since September, the Fed has reiterated its measured approach to this easing cycle. At the November policy meeting, Federal Reserve Chair Jeremy Powell noted, "Nothing in the economic data suggests that the committee needs to be in a hurry.” Powell added that policymakers can “afford to be a little more cautious” while nudging the policy rate down to a neutral level, as the US economy has demonstrated surprising resilience.

Headline Consumer Price Index (CPI) rose to 2.7% for the twelve months ending November, a 0.3% month-over-month increase from October (on a seasonally adjusted basis). Core CPI, which removes food and energy, rose 3.3% at an annual rate in November and 0.3% from October. November’s Producer Price Index (PPI), which rose 3.0% on an annual basis and 0.4% on a monthly basis, is now at the highest annual rate since February 2023.

After weather and strike-related interruptions created some noise in October’s labor market data, US employers added 227,000 jobs in November (exceeding the consensus forecast of 220,000 jobs). Job gains for September and October were also revised up by a total of 56,000. Wage growth also rose 0.4% in November over the prior month (+4.0% on annual basis), while the unemployment rate rose from 4.1% to 4.2%. On the small business side, the National Federation of Independent Business reported that its small-business optimism index jumped in November to its highest reading since June 2021. Taken together, signs of stubborn inflation and a resilient labor market support the Fed’s slower pace of rate cuts in 2025.

Addressing the elephant in the room – trade tariffs

Over the last month, speculation surrounding the potential policy changes brought by the incoming White House administration has reached a fever pitch. While the prospect of trade tariffs, major immigration reform, and tax changes, make for compelling headlines, we do not yet know what policies will take shape in 2025, nor the impact they will have on the US economy, inflation, and subsequent monetary policy decisions. At present, we have more questions than answers for how potential policy changes may affect the economy, markets, and commercial real estate in 2025.

First – which policies will be prioritized? Tariffs, tax cuts, deregulation, and immigration are all on the table, but it remains unclear which will actually garner attention and support. Second – of these prioritized issues, to what degree will existing policies and regulations change? To assess the potential impact, we first need to know what’s changing. Third – for priorities that do see meaningful change, what is the timing or when will these take effect? These questions are certainly being explored by the Fed and FOMC members as they consider the monetary policy path forward, and we may gain clarity on some of these questions in the coming weeks and months. As of right now, however, it’s too soon to call with confidence without making some very big assumptions.

Despite the many questions to be answered and hard data needed to support a more certain forward path for the Fed, there are signs of optimism for the year ahead seen in business sentiment and recent market performance. Based on current market movements and indications of consumer and business sentiment, there seem to be many who feel optimistic.

What impact will this Fed rate cut have on US commercial real estate?

As with any interest rate adjustment, it’s important to reiterate that changes to monetary policy take time to flow through and materialize in the market. In the near term, the effect of cuts to US interest rates – as well as the prospect of continued rate reductions – provides relief in the form of increased sentiment and capital market confidence on the prospects of future lower capital costs. However, even after three rate reductions, the Fed Funds rate remains well above the pre-pandemic peak Fed Funds rate; so it will likely take further cuts – or perhaps the normalization and broad acceptance of a higher interest rate environment – to see a strong rebound of activity across the US commercial real estate market.

A lower cost of capital is, of course, supportive of more development and transaction activity. However, equally (if not more) important to the cost of capital, is the availability of capital. While easing monetary policy may make financing less costly, that doesn’t matter if the capital is not available to those who seek it.

While the Fed’s pace of rate cuts may frustrate many, particularly those in industries that rely heavily on debt and capital market financing, like commercial real estate, there is rationale to the approach. Sometimes, it might seem like the Fed is taking too long to make a move, but it is because FOMC members are trying to ensure they do not make any counterproductive or unsubstantiated decisions.

That said, the recent cycle demonstrated that in times of major market distress, the Fed will act boldly and quickly to ensure proper market functioning – and perhaps that can provide some degree of comfort. For now, market sentiment appears optimistic, with a boost in outlooks and expectations for the year ahead.

Although monetary easing is not immediately felt by CRE investors, CRE is not an ‘immediate’ asset class, and investors are already considering and planning for the years to come and what the market environment may look like then. While sentiment seems to have surged across many aspects of capital markets and the economy, the CRE markets are in the process of thawing – and we should get a better sense of how quickly they will warm over the next year.

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