Investors have been watching recent Federal Open Market Committee meetings for signs that the Federal Reserve will finally begin cutting the federal funds rate. Each decision to hold rates steady has generated new debate over what it means for the broader economy and for commercial real estate borrowing costs.
Conventional thinking in the CRE community has tended to equate higher policy rates with a persistently higher cost of capital, and lower policy rates with cheaper borrowing and stronger values. A new report from Newmark, however, argues that this view overlooks what typically drives the Fed to cut in the first place.
The report notes that the desire for rate cuts ignores the fact that easier monetary policy is usually deployed when investors are already pulling back. Joseph Biasi, Newmark’s Head of Commercial Capital Markets Research, told Connect CRE that Fed rate cuts are often a response to the need to inject capital into the system when investors are reluctant to deploy funds.
Biasi explained that when less investment capital is available, cap rates tend to rise as sellers hold out for higher pricing while buyers favor more liquid, lower-risk assets. In that environment, real estate capital returns weaken. From this perspective, stable rates can provide a stronger foundation for CRE strategies than rate cuts that accompany deteriorating conditions.
The report acknowledges that rate cuts are not inherently negative. Lower benchmark rates can reduce debt costs, allow investors to use more leverage and support property prices. But these benefits would only fully materialize if rate cuts occurred in isolation, without broader economic stress.
Because the Fed is charged with pursuing stable inflation and maximum employment, the report emphasizes that meaningful easing usually appears when the labor market is weakening. Biasi said most investors recognize that demand for space is ultimately driven by economic performance, not rate levels alone, but misunderstandings persist about how declining rates and growth interact.
He pointed out that the Fed generally raises rates into a strong economy and cuts into a soft one, aside from episodes of stagflation. Markets, he added, have been hoping for the unusual combination of rate cuts alongside robust growth, something the U.S. has only approached in the past year and even then under a cloud of uncertainty.
Looking back over the past 36 years, Biasi identified four major easing cycles. In the early 1990s and late 2000s, cuts coincided with recessions and CRE performance declined as the economy contracted and both debt and equity investors adopted a risk-off posture. The 2001 and 2020 cycles were milder in recessionary terms, but the report suggests the scale of easing may have contributed to the 2008 downturn and to the sharp rate hikes seen in 2023.
Biasi noted that lower policy rates can support higher transaction volumes, but when cuts are tied to economic weakness, investors often pivot toward liquid, value-preserving assets. That shift limits the capital available for acquisitions just when many would prefer to sell, pressuring real estate returns.
Despite higher policy rates today than in the 2008–2019 period, Biasi observed that overall CRE transaction volume in the first quarter of 2026 was 21% above the 2017–2019 average.
For investors, Biasi recommended focusing less on the timing of individual rate moves and more on employment and inflation signals that guide Fed decisions. Rising unemployment or inflation falling below the 2% target could indicate future cuts, while upward shifts in inflation expectations risk pulling forward demand, fueling realized inflation and prompting even more aggressive tightening. The report also flagged uncertainty around energy-driven inflation and noted that structural forces that have pushed rates lower over time carry long-term implications for CRE demand.
