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The Federal Reserve last Wednesday voted to lower its target range for the federal funds rate by 50 basis points (from a range of 5.25%-5.50%, down to 4.75%-5.00%), marking the first decrease in this benchmark interest rate since rate hikes began in March 2022.

This will certainly be a welcome relief to many commercial real estate developers and owners, who have largely hit the brakes on borrowing after experiencing two years of minimal cost of capital while the federal funds rate was held at zero or near zero during the pandemic. As interest rate hikes took hold in the lending sector towards the latter half of 2022, commercial real estate borrowers largely abandoned the conventional mortgage market, either deferring financing in the hopes of a short-lived peak, extending existing mortgages and credit lines with now enviably low interest rates or raising capital through alternative equity structures. Those who chose to borrow were mostly “forced” borrowers — borrowers with equity to protect who faced a looming maturity default and who could not get an extension or those who wanted construction loans and decided the cost of waiting for rates to drop was not worth the delay in starting to build.

Likewise in the residential real estate sector, existing homeowners have been hesitant to hit the housing market knowing what interest rates they will face with a new mortgage, and prospective homeowners, although originally expected to shy away from the housing market as interest rates climbed, have, in fact, continued to maintain strong demand for housing, leading to a logjam of low inventory and high demand throughout many parts of the country.

As interest rates now appear to have reached a peak, we may start to see signs of thawing from the freeze in both the commercial and residential real estate markets, especially by those borrowers who can no longer afford to wait. However, a large proportion of commercial and residential borrowers will likely continue holding with bated breath for further interest rate cuts, as the Fed’s median projections are for cutting interest rates by another 25 basis points through the end of the year, 100 more basis points through the end of 2025, followed by another 50 basis points through the end of 2026. One thing remains certain, however, — absent another recession, pandemic, or other disastrous calamities to the US economy — the times of a zero or near zero federal funds rate are not coming back anytime soon. The Fed currently projects a leveling-off of the federal funds rate at about 2.9% by the end of 2026 and beyond.

We will continue to monitor for updates.

The post Turning the Page on Interest Rate Hikes? What the Fed’s Rate Cut Means for the Commercial and Residential Real Estate Markets appeared first on Greenspoon Marder LLP.