The US Federal Reserve has granted the commercial real estate market a temporary interest rate pause. By 10 votes to 2, the Federal Open Market Committee (FOMC) kept the federal funds rate in the range of 3.75 to 4 per cent. This decision came six weeks after the first rate hike since 2023. Despite the current pause, the sector is already preparing for further tightening before the end of the year, as inflation remains significantly above the two per cent target. Fed Chair Kevin Warsh explained that while employment conditions remain solid, persistent inflation has burdened citizens for nearly six years and the central bank has a duty to rein it in.
The central bank meeting followed US Department of Labor data from 14 October, which showed that consumer prices rose by 3.7 per cent year-on-year in September, up from 3.4 per cent in August. At the previous meeting on 16 September, the FOMC had unanimously raised the interest rate by a quarter of a percentage point. According to the central bank's current rate projections, 16 of the 18 committee members support a further rate step this year. The two dissenting votes on Wednesday came from Governor Lisa Cook and Beth Hammack, President of the Federal Reserve Bank of Cleveland, both of whom advocated an immediate 25 basis point increase.
Restraint in the transaction market and pressure on financing
Uncertainty over interest rate levels for the remainder of the year and for 2027 is noticeably dampening transaction volumes. Ian Ross, founder and managing principal at SomeraRoad, noted that market participants are currently mostly adopting a wait-and-see approach due to the uncertain situation. Sales are currently taking place primarily where owners are under pressure to offload assets, offering acquisition opportunities to selective investors. In contrast, sponsors and owners without acute liquidity needs prefer to hold off on sales until clear signs of stability re-emerge.
Additional pressure came from yields on ten-year US Treasuries, which surpassed the five per cent mark ahead of the September meeting for the first time since 2007 and closed at 4.992 per cent on 27 October. Patrick McGlohn, Senior Managing Director at Berkadia, explained that this development, combined with shifting rate expectations, has made structuring ongoing deals considerably more difficult. Increased capital costs and adjusted loan-to-value (LTV) requirements have led to a marked reassessment among lenders.
Divergent trends across asset classes
Despite the interest rate environment, the lending picture remains nuanced. Jay Neveloff, partner and head of US real estate at the law firm HSF Kramer, observed no decline in transaction activity over the past two months, as private lenders continued to deploy capital. While the commercial mortgage-backed securities (CMBS) segment is suffering under the prevailing conditions, private players are focusing primarily on sound underwriting standards rather than marginal interest rate movements.
Market adjustment is also progressing unevenly across sectors. Aaron Terrazas, an independent economist and visiting lecturer at the University of Washington, emphasised that industrial real estate remains robust nationwide, whereas multi-family housing in the Sun Belt region is grappling with oversupply. Although loan defaults have risen, systemic disruptions have so far failed to materialise. Investors still have capital at their disposal, but are now demanding realistic valuations. Meanwhile, central bank chief Warsh announced that the Fed would streamline the number of its interest rate decision meetings in the medium term, using selected dates to address fundamental strategic matters.
