- The Federal Reserve’s September rate cut was the first since 2020, lowering borrowing costs and setting the stage for renewed activity in the CRE sector.
- Overall CRE sales picked up in Q2, with transaction volumes up 13.9%, driven largely by multifamily properties.
- However, the office sector continues to struggle, with high vacancy rates and declining property values despite modest improvements.
According to CNBC, the U.S. commercial real estate market appears to be on the mend, aided by the Federal Reserve’s recent interest rate cut. Wells Fargo analysts describe the Fed’s policy shift as a “notable green shoot” that could provide much-needed momentum for rate-sensitive markets.
However, the recovery is expected to be uneven, with multifamily properties showing stronger gains compared to the still-struggling office sector.
Setting The Scene
In September, the Federal Reserve cut the Fed funds rate by 50 bps, which has already had a positive effect on the commercial property market. Lower borrowing costs mean more refinancing and deal activity after a prolonged period of falling transaction volumes and property valuations.
Wells Fargo analysts suggest that while the rate cuts are not a “magic bullet,” they have laid the groundwork for a potential recovery.
With more cuts hinted to be on the way, there’s growing optimism that sustained lower rates will foster more market stability, encouraging investors and developers to re-engage in deals.
Recovering Sales
After years of stagnation, CRE sales volumes finally saw a quarterly increase for the first time since 2022, driven largely by transactions in the multifamily sector.
In fact, Q2 recorded over $40B in transactions, up 13.9% from the previous quarter, though still 9.4% lower YoY, according to Altus Group.
Multifamily Matters
Net absorption for multifamily units hit its highest level in nearly three years during Q2, driven by steady construction and increasing tenant interest. Developers are on track to complete over 518K rental units by the end of the year.
While rent growth slowed to around 1% from 2021’s double-digit gains, multifamily properties remain attractive to renters who face high homeownership costs. According to Wells Fargo, the average monthly mortgage payment was $2,248 in Q2, significantly higher than the average rent of $1,712. Stabilizing vacancy rates, holding at 7.8%, further indicate a stabilizing market.
Office Obstacles
Despite some encouraging signs, the office sector is still struggling. Net absorption turned positive in Q2 for the first time since 2022, with more than 2 MSF of space occupied. However, this modest gain was not enough to offset the broader challenges of rising vacancies and declining demand, pushing the availability rate to 16.7%—a new high.
Major cities, including Manhattan, continue to grapple with reduced office occupancy rates, with visitation levels still below pre-pandemic norms. Hybrid work models and slower office job growth have created structural challenges, as highlighted by Chad Littell of CoStar Group, who noted that the recovery for office properties could take another year or more to stabilize.
The Path Forward
While recent rate cuts have helped renew optimism, industry experts like Alan Todd of Bank of America caution that the psychological impact of the Fed’s actions will be a key driver of market behavior. As lower rates signal stability, it is expected that more investors will return to the market, unlocking pent-up demand and revitalizing deal flows.
Willy Walker, CEO of Walker & Dunlop, observed a pickup in refinancing and sales volumes, noting that the easing of rate pressures has helped thaw the standoff between buyers and sellers, which had previously stalled market activity. As transaction volumes continue to rise, particularly in multifamily, analysts see a path to broader recovery, albeit an uneven one.
