The Federal Reserve's decision to cut the federal funds rate by 50 basis points, bringing it to a range of 4.75% to 5.00%, marks the beginning of a series of anticipated rate reductions that are expected to significantly influence the commercial real estate market. According to projections from the Federal Reserve, two additional rate cuts are expected this year, with four more planned for 2025. Based on expectations for neutral policy rates, the Fed anticipates completing or nearing the end of its rate-cutting cycle by early 2026, as analyzed by Cushman & Wakefield.

This forecast is in line with CBRE's prediction of 25 basis point cuts in both November and December, followed by an additional 125 basis points in reductions next year. The market has responded with caution; interest-rate futures contracts now indicate a 70% probability of a quarter-point cut in November, rising from 65% following recent economic data that showed an unexpected drop in unemployment insurance claims. The recent rate cut also decreased the Secured Overnight Financing Rate (SOFR) by 50 basis points. Assuming risk spreads over the base rate remain stable, floating rate debt has become less expensive, according to Cushman & Wakefield. This reduction may assist some borrowers in finalizing deals and help others manage existing floating-rate debt challenges5.

In terms of spreads, fixed-rate debt is currently pricing at approximately 175 to 250 basis points over Treasurys, aligning with historical averages. The reduction in overall debt costs due to lower base rates aids the financial engineering of commercial real estate deals by restoring some neutral or positive leverage conditions for fixed-rate products relative to cap rates. Floating rate debt, linked to SOFR, remains priced in the 7% to 7.5% range but is expected to decrease following the rate cut. Cushman & Wakefield noted that further rate cuts would be necessary before floating rate debt achieves neutral or positive leverage territory.