Fed Lowers Rates by 50 Basis Points, Additional Cuts Projected this Year

Federal Reserve policymakers voted to cut the federal funds rate by half a percentage point to a target range of 4.75%-5%, their first rate reduction since 2020. In the September Summary of Economic Projections (SEP), Federal Open Market Committee (FOMC) participants projected additional cuts this year and next and a median federal funds rate of 4.4% at the end of 2024 and 3.4% at the end of 2025. Median PCE inflation was projected at 2.3% this year and 2.1% next year, with GDP and the unemployment rate expected to stay steady at 2% and 4.4%, respectively, for both years.

“As the economy evolves, monetary policy will adjust in order to best promote our maximum employment and price stability goals,” Fed Chair Jerome Powell said. “If the economy remains solid and inflation persists, we can dial back policy restraint more slowly. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.”

Optimism Returning to CRE Market

“The Fed’s 50 bps rate cut will inject much needed optimism into a national commercial real estate market that’s been weak for the last two years,” said Matt Dzbanek, Senior Director in the Capital Services Group at GREA New York. “When combined with the additional projected cuts, we can expect to see more robust commercial real estate transactions and refinancing activity the rest of this year and especially in 2025.”

In the quest to lower inflation to its 2% goal, the Fed rapidly increased the fed funds rate over 11 meetings to a 23-year high of 5.25%-5.50% where it remained for over 13 months. Higher interest rates depressed investment sales across the country with multifamily, office, industrial and retail sales volume falling year-over-year for seven consecutive quarters beginning in Q3 2022 and increasing only slightly in Q2 2024, according to Moody’s CRE.

Borrowers that were sitting on the sidelines for months began resurfacing following Chair Powell’s bullish comments after the July 31 FOMC meeting, which triggered a drop in Treasury rates, Dzbanek said.

“The 5-year Treasury fell below 3.5%, a 52-week low, so we’ve already started seeing deals that didn’t pencil out at a higher interest rate working in the falling rate environment,” he said.

Motivated Lenders Ready to Transact

“Additionally, we’re advising lenders nationwide on note sale portfolios as they continue to address both performing and nonperforming assets in order to redeploy capital and take advantage of new opportunities moving forward,” he said.

As more lenders return to the market, they are bidding on deals and competing for business by offering attractive terms with additional proceeds. “Cash flowing mixed-use and multifamily buildings and condo construction projects in New York City are getting the green light from lenders because of the high demand for housing and lack of supply,” Dzbanek said. “Ground-up construction and renovation projects are more attractive now because lenders recognize that interest rates have peaked, therefore, it’s easier to underwrite these loans appropriately.”

For example, Dzbanek recently closed two construction loans for development projects in Brooklyn and has additional deals in the pipeline, all of which have been receiving 10 to 15 quotes on average, giving borrowers ample options to choose from. Both banks and debt funds are currently active in the construction space.

The Capital Services team also is working on a number of value-add industrial deals that are generating interest from banks and debt funds, and a number of affordable housing transactions that are attracting banks and agency lenders.

Looking Ahead

“This rate cut and the indication of future rate cuts will restore confidence among borrowers seeking to acquire properties or refinance existing loans,” Dzbanek said. “We’re very excited about the prospect of seeing more activity in the market.”

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More information is available from Matthew Dzbanek at 212.544.9500 ext.48 or e-mail.