The second Federal Open Market Committee (FOMC) meeting under new Federal Reserve Chair Kevin Warsh once again indicated a reality of higher and longer-lasting interest rates for the commercial real estate sector. In a 9-to-3 vote, the FOMC on Wednesday left its benchmark interest rate between 3.5 per cent and 3.75 per cent for the fifth consecutive time. Inflationary risks due to the ongoing war in Iran were cited as the reason. Inflation remains significantly above the Fed's 2 per cent target, while Warsh has laid the groundwork for a potential change in the data approach to shaping monetary policy decisions.
Chair Warsh stated in a post-meeting press conference that the FOMC has no 'soft target' for inflation and remains committed to the annual rate of 2 per cent as its primary objective. He added that a new chapter has begun, and the over five-year period of above-target inflation cannot be cured within nine weeks or by a single month of moderate price declines. The Fed would not waver, as its credibility relies on performing its duties and fulfilling its responsibilities.
The decision to maintain interest rates met with dissent: regional FOMC Presidents Beth M. Hammack of Cleveland, Neel Kashkari of Minneapolis, and Lorie K. Logan of Dallas voted against it, favouring a quarter-point increase. Warsh’s second meeting at the helm of the Fed, after succeeding Jerome Powell in May, came two weeks after his testimony before Congress that the FOMC has 'no tolerance for persistently high inflation'. He also spoke about whether traditional inflation metrics such as the Consumer Price Index and Producer Price Index should be reconsidered.
The new Fed Chair established a working group in June to investigate whether the central bank's long-standing inflation metrics need to be changed. Results are expected later in the year. The latest data from the U.S. Bureau of Labor Statistics showed a Consumer Price Index 1.5 percentage points above the Fed's 2 per cent inflation target, and a Producer Price Index 3.5 percentage points above it. Jay Neveloff, Chair of US Real Estate at HSF Kramer, commented that the general understanding of what defines inflation may need to be re-evaluated. The guidelines used for decades may no longer be appropriate, and if there is always low inflation, there may be no need for rate increases.
According to Neveloff, expectations of higher interest rates are not slowing down deal activity. Many investors are looking for opportunities in properties that need recapitalisation or in distressed assets, where borrowers risk handing the keys back to lenders. Neveloff noted that there is still plenty of capital available that investors are willing to put into real estate, particularly from overseas. Briggs Elwell, co-founder and CEO of RLTYco, which provides financial and tax services to real estate clients, stated that the commercial real estate sector has largely adjusted to the reality of higher and longer-lasting interest rates in recent years.
Elwell explained that a sustained stabilisation of interest rates and cap rates this year will lead to more investment in the US commercial real estate sector. A significant reason for a potential increase in CRE transactions in the second half of 2026 lies in more flexible lending standards, supported by updated Basel III rules, which were released by US regulators in March 2026. These new standards reduced capital requirements for banks. Elwell predicts that capital providers will willingly re-enter the market, as lenders face fewer restrictions and view the market as more stable.
Ryan Reich, Chief Financial Officer of developer Mountain Shore Properties, said that deal activity is very selective in the current high-interest-rate environment, with borrowers seeking only 'absolutely necessary' refinancings. Despite recent interest from some banks in increasing lending, many remained hesitant to loosen their underwriting standards for the deals Mountain Shore typically targets – with volumes between US$25 million and US$75 million. The CFO described the current environment as a fraction of the aggressiveness observed 15 years ago. When interest rates are higher, less leverage can be used for the same loan; however, at 8 to 9 per cent interest, nothing works. The current environment does not allow for deals with a capital structure where the primary loan is in the highest single digits.
The Fed had previously raised interest rates in 11 out of 12 FOMC meetings between March 2022 and July 2023 to 5.25 to 5.5 per cent, followed by a 14-month pause. Although the FOMC has cut interest rates a total of six times in 2024 and 2025, rates remain significantly higher than the near-zero lending levels during the COVID-19 pandemic. Shivan Perera, Managing Director at Bridge, an AI-driven direct lender for hotel owners, observes that the hotel industry is only just experiencing a revaluation as a result of the Fed's earlier aggressive rate hikes. Perera expects an increase in transaction activity in the hotel sector as hotel cap rates adjust to the longer-term higher interest rate conditions. He emphasised that the market has finally reached equilibrium, creating many new trading opportunities. Valuing a deal is now easier than before, as interest rates are considered stable and the types of cap rates and the interest rate environment are known.
