WASHINGTON – The commercial real estate market has a lot to gain if the Federal Reserve follows through on anticipated interest rate cuts this year. It was under high interest rates that the number of commercial transactions dropped by 60% in 2023 compared to 2021, National Association of Realtors® Chief Economist Lawrence Yun said Thursday at the association’s quarterly Real Estate Forecast Summit. Lower interest rates would mean recovery for the industry and collateral value, as well as more transactions and leasing activity.
The Federal Reserve will base the timing of interest rate cuts on certain data points. One of those points is consumer price inflation, which is currently at 3.1%. The goal is to be at 2% or a little lower. “You may scratch your head and ask, ‘Aren’t 3% and 2% pretty much the same?’” said Yun. But in economics, 2% is preferable to 3%, he added.
Despite the need to hit the 2% mark, Yun said he anticipates these progress markers:
- The Fed is likely to make four to six rate cuts over the next couple of years. “Whatever doesn’t happen this year will simply be extended to next year. Inflation will be much calmer later this year and as we go into 2025,” Yun said.
- The 10-year Treasury yield is likely to settle at 3.5%.
- Commercial property prices are likely to stabilize and recover, though challenges remain in the office sector.
- Moderate growth in the GDP is likely to still add to net leasing and investment sales.
- Land and single-family development likely will do well.