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In other words, it’s not your typical rate cut.
For seasoned investors, this raises some important questions. How should we react? What impact will this cut have on our portfolios? And more importantly, how do we stay ahead in a market that’s tightening in many respects?
Let’s get into the numbers and the strategy behind the cut.
How Are CRE Investors Impacted? Lower Costs, Higher Caution
Historically, interest rate cuts have been a boon for commercial real estate (CRE) investors. CBRE data confirms, a 25-basis point cut in rates has historically reduced financing costs by around 1.5% to 2% ¹ for CRE projects. Mortgage Bankers Association (MBA) data also aligns with this theory saying that a 50-basis point rate cut typically results in a 5% to 10% reduction in borrowing costs for CRE investors ². Which could be the future case.
But before you start celebrating, take note: the same cuts often have a delayed impact on cap rates, meaning values may not adjust overnight. Lower interest rates usually mean lower borrowing costs for investors, which should translate to more capital available for real estate projects. So definitely you can expect an increase in cash flows, making it easier for you to service debt and improve profitability, especially for highly-leveraged properties. However, it’s not all roses.
The current market backdrop—high inflation and a slowdown in construction due to lingering supply chain bottlenecks—means lower rates might not immediately spur development in all sectors. Plus, competition for high-quality assets is tighter than ever, and some investors may find it difficult to close deals even with cheaper debt available.
Effect on Value-Add Investors - Cost of Renovations Is Key
Value-add investors stand to benefit from this rate cut, particularly those focusing on renovation-heavy projects. The logic is simple: less money going into interest payments means more funds can be allocated toward property improvements. Also, giving a property a chance to meet future demand is a smart move. But what do the numbers tell us?
Recent data from the National Association of Real Estate Investment Trusts (NAREIT) shows that value-add investments historically perform best in environments with low financing costs, with average returns outpacing the broader CRE market by 2-3% during low-rate periods ³. Lower interest rates allow investors to pursue more aggressive capital improvements while maintaining attractive returns.
That said, construction costs are still skyrocketing. Currently the building material prices have increased by over 40% in the last few years, meaning that the benefits of lower interest rates could be offset by higher renovation expenses ⁴.
In short: value-add investors should proceed, but cautiously, and focus on projects where the ROI justifies the increased costs of materials and labor .
Demand & Supply Dynamics. Can Demand Keep Up?
Lower interest rates are often intended to stimulate demand, and this cut is no exception. But here’s the kicker—demand is already sky-high in certain CRE sectors, particularly multifamily and industrial properties, while supply has been severely constrained .
Take multifamily real estate as an example. new data indicates that demand for multifamily units has outpaced supply by 5% annually in major metros over the past five years ⁵. And it’s not just demand from tenants; investor demand has been equally strong. Multifamily cap rates have compressed by over 100 basis points since 2020, making it harder to find deals with attractive yields.
However, the supply side is where things get interesting. The U.S. Census Bureau reports that new multifamily construction permits are down by 12% year-over-year, as developers grapple with rising material costs and labor shortages ⁶ . In other words, even with lower interest rates, supply is unlikely to catch up anytime soon. This could further drive up property prices in the short term, making it a seller's market for those who already own assets.
Why This Fed Cut Might Be Different, Timing Is Everything
Unlike the rate cuts we saw in the post-2008 era, this Fed move comes at a time of immense economic uncertainty. Inflation is still hovering near 5-6%, and the Fed is walking a tightrope between stimulating the economy and keeping inflation in check. Historically, rate cuts during inflationary periods have had mixed results.
Research from the Federal Reserve Bank of St. Louis suggests that rate cuts during inflationary times often take longer to boost real estate prices because of higher risk premiums demanded by investors. Simply put, even though financing is cheaper, investors remain cautious, waiting for clearer signals from the market before jumping back in. This creates a window of opportunity for those willing to move faster and take calculated risks ⁷.
But there’s another wrinkle: the timing of this rate cut is critical. Real estate investors must weigh whether they want to lock in cheaper debt now or wait and see how inflationary pressures impact property values over the next 12 to 18 months. Waiting too long could result in missing out on prime opportunities, while moving too quickly could expose investors to overvalued assets.
Is It a Good Time to Expand Your Multifamily Portfolio?
I know this is off-topic but still our favorite topic, and I cannot simply write the biggest news of the year without mentioning it. Given the supply-demand imbalance in multifamily housing, this rate cut might just be the green light multifamily investors have been waiting for. With demand far exceeding supply in most urban areas and construction lagging, there’s a strong case for expanding portfolios now.
Cushman & Wakefield Report suggests that multifamily rents are expected to grow by 6-8% annually over the next two years, even in a slower economic environment ⁸. With this in mind, locking in lower rates now could allow investors to get capital appreciation and rental growth.
…But it’s not just about expanding blindly—investors should be focusing on quality assets in strong markets with a history of stable demand. Beware of the “race to the bottom” in terms of price. Cheaper isn’t always better in the long run. As I often say, the goal in real estate is to get the best results, not the cheapest deal. Quality investments tend to hold their value better during downturns, providing a safety net in volatile markets.
Play It Smart, Not Fast
The Federal Reserve’s interest rate cuts undoubtedly create opportunities, but they come with caveats. While borrowing costs are lower, the market’s supply-demand dynamics and rising construction costs complicate the picture. For CRE and value-add investors, the key will be to stay nimble and make data-driven decisions.
In an environment where timing is everything, expanding your multifamily portfolio or pursuing value-add projects could be the right move—but only if the numbers make sense. The best investors will know how to balance short-term opportunities with long-term risks, leveraging this rate cut to their advantage without getting caught in the hype.
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CBRE. (n.d.). Data on financing. CBRE. Retrieved from https://www.cbre.com/insights/reports/us-cap-rate-survey-h1-2024
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Mortgage Bankers Association. (n.d.). Commercial real estate report. MBA. Retrieved from https://www.mba.org/news-and-research/research-and-economics/commercial-multifamily-research
- NAREIT. (n.d.). Value-add investment performance. NAREIT. Retrieved from https://www.reit.com/data-research/research/updated-cem-benchmarking-study-highlights-reit-performance
- Turner Construction. (n.d.). Cost index. Turner Construction. Retrieved from https://www.turnerconstruction.com/cost-index
- Cushman & Wakefield. (2023). Multifamily real estate analysis. Cushman & Wakefield. Retrieved from https://www.cushmanwakefield.com/en/united-states/insights/unpacking-multifamily-supply-risks-and-demand-booms?
- Real Page (2023) Census is Likely Overstating Multifamily Starts in 2023. Retrieved from https://www.realpage.com/analytics/us-census-starts-probably-overstated/
- Federal Reserve Bank of St. Louis. (n.d.). Rate cuts and real estate prices research. Retrieved from https://www.npr.org/2024/09/18/nx-s1-5111859/federal-reserve-rate-cut-housing-home-prices-mortgages
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Cushman & Wakefield. (2023). Commercial real estate market trends. Cushman & Wakefield. Retrieved from https://www.cushmanwakefield.com
