Navigating the Fed’s latest move: what rate cuts could mean for CRE

The Fed’s rate cut boosts confidence in commercial real estate, improving investor sentiment, underwriting, and capital costs to fuel recovery.

Rate relief raises spirits

Commercial real estate stakeholders have been watching closely as the Federal Reserve signaled a shift toward rate cuts, which came to fruition on Wednesday, September 17, with the announcement of a cut to the benchmark interest rate by a quarter percentage point. While the magnitude of this cut remains uncertain, the impact will ripple across sectors in distinct ways.

“The Fed’s interest rate cut delivers a critical confidence boost for the commercial real estate industry, signaling a positive shift in market sentiment and supporting the ongoing recovery cycle,” says Mark Rose, Chair and CEO, Avison Young. “While a 25-basis-point reduction may not materially transform the landscape overnight, it meaningfully improves investor psychology, underwriting conditions, and the cost of capital – key ingredients for renewed momentum. These cuts are part of a broader set of building blocks necessary to restore liquidity, enhance debt availability, and stimulate investment activity across asset classes.”

Here's how each major asset class is positioned and what investors, owners, and occupiers should be thinking about now.

Capital markets: a turning point for office debt and beyond

Many economists anticipate a series of rate cuts in the coming months; the market could see two more this year and potentially another in 2026. For commercial mortgage markets – especially in office – this could be a pivotal moment.

Rate cuts may finally reward owners and lenders who’ve relied on extensions to avoid foreclosure. For office investors, lower rates could signal it’s time to act on long-delayed business plans. The logic for postponing sales in a high-rate, uncertain-demand environment is weakening. We expect to see larger trades and more conviction from sellers.

Distressed assets may find resolution through sales to new owners with fresh capital a realistic basis. Outside of office, distress remains limited. Stabilized multifamily assets – previously illiquid in a high-rate environment – are likely to re-enter the market in greater volume.

Office: rate cuts are nothing but positive and office will feel the greatest impact

"With this interest rate cut, the office sector – particularly class A and B properties that have experienced significant value adjustments – stands to benefit most," says Rose. “Lower interest rates improve the economics of both development and acquisition, unlocking pathways to capital and encouraging office occupiers and investors alike. As expectations build for additional cuts totaling up to a full percentage point, the industry is poised to accelerate its recovery from trough to peak.”

“Ultimately, this is not a magic fix, but a vital step forward – one that reinforces fundamentals, strengthens financial viability, and restores the confidence needed to get back to business.”

Rate cuts:
– Ease debt service costs
– Help borderline loans survive
– Rarely shift fundamentals overnight

Return to office:
– Drives new leasing activity
– Strengthens cash flow
– Improves valuations and refinancing potential

Accelerating return-to-office trends have a direct impact: increased leasing activity, stronger cash flow, and improved valuations. These are the metrics that determine whether a building can refinance or avoid distress. In short, rate cuts buy time – but the return-to-office movement creates real recovery.

Industrial: poised for a rebound in development and demand

Industrial has been in a holding pattern. The Fed’s aggressive hikes over the past two years effectively shut down the development pipeline, with proposed development outpacing new groundbreakings. But industrial is nimble – and a rate cut could reignite growth.

CONSTRUCTION PIPELINE APPEARS TO HAVE PLATEAUED AT LOWEST LEVELS IN +10 YEARS

Source: Avant by Avison Young, CoStar

What's driving renewed industrial momentum:
– Rate cuts could lower construction borrowing costs
– Big Beautiful Bill enables 100% expensing for buildings
– Manufacturing demand is rising across industries
– Supplier demand is expanding nationally

Developers may finally have justification to bring new projects to investment committees, knowing that delivery timelines align with future demand. Vacancy rates remain elevated, but the sector is expected to benefit from a surge in manufacturing users – and the suppliers that support them.

MANUFACTURING CONSTRUCTION SPEND CONTINUES COOLING, BUT MOMENTUM BUILDS FOR REBOUND

Note: As of May 2025 (most recent data). Source: Avison Young Technologies, Federal Reserve Bank of St. Louis

As manufacturing demand grows, so will supplier demand – echoing the e-commerce boom of the mid-2010s and expanding the industrial footprint nationwide.

Multifamily: demand surges, investment activity slows

Multifamily continues to show strength in demand, even as investment activity lags. Elevated mortgage rates are driving renters into the market, pushing absorption rates higher. In fact, average annual absorption is on pace to increase 34.6% when comparing 2018–2020 to 2023–2025.

MULTIFAMILY DEMAND | ABSORPTION AND MORTGAGE RATES

Source: Avison Young Market Intelligence, CoStar

Absorption in the first half of 2025 already reached 51.5% of 2024’s year-end total – a strong signal of sustained demand.

On the investment side, however, the story is different. Following the Fed’s rate hikes in 2022, multifamily sales volumes declined 33.9%. Elevated Treasury rates continue to challenge underwriting and pricing, even as fundamentals remain solid.

MULTIFAMILY SALES VOLUME AND TREASURY RATES

Source: Avison Young Market Intelligence, RCA

Retail: sentiment shifts ahead of holiday season

This rate cut comes at a critical moment – just as the holiday shopping season begins. While the financial impact will lag, the psychological boost could lift consumer confidence and spending forecasts.

For consumers, the benefit is mostly emotional in the short term. Lower rates take time to reduce borrowing costs, but they may support modestly higher spending in the fourth quarter. For this to translate into sustained strength, we’ll need continued disinflation, a stable labor market, and rising confidence into 2026.

Retailers, meanwhile, have already locked in inventory and strategy for the year. The upside now lies in margins, financing costs, and potentially stronger-than-expected demand – especially for small and mid-size operators.

Strategy starts with expert insight

Looking ahead, further rate cuts could provide significant stimulation for the commercial real estate community; generating many connection points for strategic discussions.

Across sectors, the impact of rate cuts will vary, but the need for strategic clarity is universal. Whether you're navigating distressed office assets, evaluating industrial development opportunities, or planning retail strategy for the fourth quarter, understanding how monetary policy intersects with market fundamentals is key.

Our team is here to help you interpret the signals, assess the risks, and act with confidence. If you’re an investor, owner, or occupier looking to make sense of the shifting rate environment, let’s connect.