Going into 2025, there has been plenty of optimism from the CRE industry given the multiple recent interest rate cuts by the Federal Reserve, leading to pent-up demand. However, not everyone is bullish that more is to come.
This was shared on a panel hosted by PwC partners Ricardo Ruiz and Bill Staffieri at ULI New York: Real Estate Outlook 2025.
TWO PANELISTS EXPRESS PESSIMISM ON RATE CUTS
Lisa Pendergast, executive director of the nonprofit trade association, Commercial Real Estate Finance Council, feels that the likelihood of additional rate cuts from the Fed from an imminent perspective is "not very good."
L.D. Salmanson, CEO of real estate software firm, Cherre, doesn't expect rates to come down in the near future either. For a while now, the Fed has been expressing caution about cutting rates too much over fears that it would spike inflation. We just after all saw what happened following the pandemic, when the inflation rate hit unprecedented heights at 9.1 percent.
For the thinking to change, Salmanson said the central bank, which has been headed by Jerome Powell since 2018, needs a "complete" regime change to the Fed. While President Donald Trump put pressure on Powell to lower rates during his first term — Salmanson doesn't think that will work this time. The Fed boss admitted recently he would not step down if the businessman-turned-politician asked him to.
BORROWING IS STILL EXPENSIVE
To make matters worse, while the Fed has cut rates by a full basis point over the past several months, borrowing remains expensive and that's leading to a challenging environment for many CRE players.
"Unfortunately, today's rate is so much higher; [figure] five and a half to 7% [range] depending on the asset," Pendergast said.
"There's this whole issue going on in the market right now where a lot of these large, single assets, single borrowers, CMBS deals, billion-dollar deals, rather than getting refinanced, [they're] just getting extended. And so there's this pile-up."
Salmanson also admitted that seven percent cap rates are too high.
"That is not friendly for development. We have to go back down to four, maybe low fives for any of this to be relevant," he urged.
Plus, borrowing is just one expense. Another concern is over what Trump will do on economic impact fronts including immigration, as he ran on deportations and cracking down on border crossings.
"If we stop immigration, we have to pay a lot more money for all the people who have to do that job, which might be good from a societal standpoint, but it's not good from an inflation standpoint," Salmanson explained.
Another issue is "degradation in cash flow," according to Pendergast.
"It's like a double negative," Pendergast explained.
"Not only are you financing at a higher rate, the value in your asset has declined from where it was, and yet you still have an outstanding loan."
DEREGULATION IS ONE BRIGHT SPOT
While unknowns remain from interest rates to other policy matters — the CRE industry has been bullish on regulations loosening under a second Trump term.
Pendergast called the regulatory waters for businesses under the Biden administration "very challenging."
"I do think that under a Trump administration, what we will see is a more business-friendly regulatory environment," she said.
"That's not that doesn't mean they're giving anything away. They are still regulators, and they will do their jobs."
Others are a little more bullish about activity ramping up. Particularly, Ruiz and Staffieri think there will be more capital deployed in the CRE industry in 2025. Sarah Hawkins, CEO of the east region of for Hines who was another speaker on the panel, said that she's seeing the floodgates open up for CMBS deals.
"The demand's coming back," she highlighted.
That's a really good thing for getting transactions going and getting the debt markets moving again."