2025 Interest Rate Outlook (and How CRE is Impacted)

As the US heads into 2025, the Federal Reserve’s approach to interest rates for the year remains a critical factor for commercial real estate professionals. 

With that said, US interest rates are likely to remain elevated in 2025, with a target federal funds rate projected at 3.9% by late 2025, according to Commercial Observer.

By The Numbers

With inflation cooling significantly from a 41-year high of 9.1% in mid-2022 to nearly 3% by late 2024, the Fed has begun cutting the federal funds rate after many years of higher-than-average rates. 

The current rate now sits between 4.25% and 4.5%—down from the 5.25%-5.5% range maintained from mid-2023 to late 2024. On Dec. 18th, Jerome Powell indicated more cuts are likely, with the target federal funds rate expected to drop to 3.9% by late 2025. 

However, inflation continues to hover above the Fed’s 2% target. As Jed Resnick, CEO of Douglaston Development, notes, while inflation has cooled slightly, “the Fed’s job is to carefully control inflation,” and they appear to have avoided a recession while managing the markets.

Contrarian Views

Despite Powell’s optimistic outlook, not all experts are convinced rate cuts are entirely warranted. Critics question whether the Fed should continue cutting rates when certain inflation metrics, like the Producer Price Index (PPI), are still rising. 

George Tietjen, managing director at Sentinel Real Estate, suggests that the Fed might be rushing to ease rates too quickly, noting that inflation has not yet hit the 2% target. With inflation still a concern, some Fed officials appear hesitant to further loosen monetary policy.

The Real Benchmark

While the Fed’s primary focus is the short-term federal funds rate, long-term interest rates—specifically the 10-year Treasury—also play a pivotal role in the CRE market. 

Conventional wisdom suggests that once inflation begins to subside, the 10-year Treasury should follow suit, but this hasn’t been the case this time around. Since Powell’s first rate cut in September 2024, the 10-year Treasury yield has risen from 3.6% to 4.6% by late December, defying expectations. 

As Stuart Boesky, CEO of Pembrook Capital Management, explains, long-term interest rates reflect future inflation expectations, and market uncertainty about the economy has kept yields higher despite short-term cuts. 

The 10-year Treasury yield, a key reference point for CRE loans, has risen in response to inflation concerns, contributing to higher borrowing costs for developers and investors.

How Interest Impacts CRE

For CRE investors and developers, interest rates—both short-term and long-term—significantly impact financing, valuations, and overall market conditions. 

During the pandemic, mortgage rates hit record lows, but the 30-year mortgage rate skyrocketed to 7.76% in November 2023. While it has since slipped back down to 6.09%, rates are expected to remain above 6% for the foreseeable future due to persistent inflation concerns.

Jillian Mariutti of JLL Capital Markets explains that the 30-year mortgage rate is closely tied to the 10-year Treasury yield. When Treasury yields rise, long-term mortgage rates follow suit, impacting financing costs for real estate purchases and refinancing. 

As a result, CRE professionals have had to adjust their strategies for underwriting loans and managing risk, especially as uncertainty around inflation persists.

Lingering Political Uncertainty

The US economy is no longer driven primarily by traditional industries but by asset-light sectors like technology, which are less sensitive to higher interest rates. 

However, the real estate sector is still highly asset-based, making it more vulnerable to the Fed’s ongoing battle with inflation. Every interest rate hike translates into higher cap rates and lower asset values for commercial properties.

The political landscape also adds another layer of uncertainty. With a new administration potentially taking office in 2025, some experts express concern that higher tariffs and tax cuts could reignite inflationary pressures. 

For instance, proposals for tariffs on goods from Canada, Mexico, and China could drive up construction costs, further contributing to inflation.

Not Out of The Woods Yet

While the Fed’s rate cuts signal that inflation is under control, the persistence of high long-term yields and concerns over future inflationary pressures make it clear that CRE professionals will face ongoing challenges this year. 

The relationship between the 10-year Treasury yield, the Fed’s actions, and real estate valuations will continue to shape the market, with uncertainty and volatility likely to persist.

Although the tariff landscape may change, they’re betting that the broader forces of nearshoring, cross-border trade agreements, and improved infrastructure will continue to outweigh the risks.