To reiterate the news, the Federal Reserve reduced the Effective Federal Fund Rate (EFFR) by 25 basis points on Sept. 17. Additionally, just about everyone anticipates that additional cuts will take place in October, December and into 2026.
However, a recently released Marcus & Millichap video, “The Fed Cut Rates: Now What?” explained that there are more drivers to commercial real estate success than an interest rate cut. Senior Vice President John Chang acknowledged that if the ten-year Treasury hovers in the 4% range, CRE activity could improve. But currently, “debt capital liquidity remains healthy, with multiple lenders active in the market,” he said. “Lender spreads have not widened thus far, so rates are comparatively low right now and investors have a window to lock in their financing.”
Chang said the Fed is monitoring the employment market, and so should commercial real estate investors.
On the office side, Chang pointed out that a slowdown in the job market could improve office-based demand, especially as more companies bolster their return-to-office strategies. Office absorption has been positive for five quarters nationwide. Chang noted that not every market has such positive numbers; however, “there is momentum in more than half of the major metros across the U.S.,” he said.
Meanwhile, retail continues to do well, and consumption is ongoing despite tariffs and the weakening labor market. Chang noted that inflation-adjusted core retail sales increased by 2.2% from the year before, with “apparel, restaurant and e-commerce delivering most gains.”
Interestingly enough, multifamily needs to be watched. Chang pointed out that the past 12 months have recorded robust apartment absorption. However, “if the ten-year Treasury stays near 4%, single-family mortgage rates could come down,” he said. “This could unlock more first-time homebuyers.”
While that might spell some tenant loss, Chang said another problematic culprit is the weaker job market. The unemployment rate among prime renters aged 20-24 years was 9.2% last month. This could put pressure on household formations, impacting rental housing demand and apartment absorption.
On the other hand, apartment construction is muted, as well. “Apartment supply and demand could remain in balance, lowering vacancy risk,” he said.
Change concluded by reiterating the need to watch interest rates. Additionally, “there are numerous economic forces at play that can significantly shift the trends one way or the other,” he added.
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