The Federal Reserve’s Federal Open Market Committee voted 11 to 1 at its December meeting to cut the fed funds rate by 25 basis points to a range of 4.25%-4.50%, the Fed’s third consecutive rate cut since September. In their December Summary of Projections (SEP), policymakers projected two additional rate cuts in 2025, down from four in the September SEP. The December report forecasts a median fed funds rate of 3.9% by the end of 2025, up from 3.4% in September, reflecting slightly elevated inflation expectations.

“We have been moving policy toward a more neutral setting in order to maintain the strength of the economy and the labor market while enabling further progress on inflation,” Fed Chair Jerome Powell said. “With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive. We can therefore be more cautious as we consider further adjustments to our policy rate.”

The market reacted negatively with the Dow Jones Industrial Average falling 1,123 points, or 2.6%, following the announcement. The 10-year Treasury note rose to 4.493% from 4.384% Tuesday.

Commercial Real Estate Overview

Although Treasury yields have continued to rise despite the Fed’s rate cuts, there has been a renewed optimism in the commercial real estate market in recent months, which has resulted in an uptick in transactions, according to Matt Swerdlow, Senior Director in the Capital Services Group at Ariel Property Advisors, a member of GREA.

“As short-term rates began declining in vehicles like High Yield Savings Accounts, which are connected to the fed funds rate, we started seeing an increased appetite for real estate deals from investors looking for more yield,” Swerdlow said. “Many of our clients have already experienced a more relaxed and open environment for raising equity in their deals compared to the last two years.“

Investors in New York City are also becoming more bullish following the approval of several pro-housing laws in the last six months. On December 5, the New York City Council passed the City of Yes, a comprehensive citywide rezoning initiative that will add more than 82,000 new apartments over 15 years and invest $5 billion in infrastructure updates and housing. And, last June, the New York State Legislature approved a new housing policy offering tax abatements to encourage new development and office to residential conversions.

Who’s Lending?

“Deals are getting done and lenders are still competing and differentiating themselves to win business,” Swerdlow said. “However, some borrowers find that when they return to their current lender to refinance a loan, they’re being rejected. Therefore, our team is casting a wider net when we run a process and on some assignments, we’re reaching out to as many as 100 lenders to find the right fit.”

Banks have scaled back their direct real estate lending and are offloading both performing and nonperforming loans to increase capital reserves. Therefore, alternative lenders are stepping in to fill the gap with private credit funds entering the market and creating additional options. For example, instead of making loans directly to commercial real estate borrowers, banks are investing in private funds, which are then making the loans.

In the third quarter, bank loan originations fell to 18% down from 38% the previous year, while alternative lenders accounted for 34% of the closed non-agency loans up from 27% last year, and debt fund activity jumped 70% year-over-year, according to a Bisnow article citing a CBRE report.

Robust Market Activity

The Capital Services Group has capitalized on the recent market momentum, closing over $75 million in loans this quarter and maintaining a strong pipeline heading into 2025.

The recently closed deals include a $33.75 million acquisition loan for Renoir House, a 105,282-square-foot, 151-unit, predominantly free market luxury residential building at 225 East 63rd Street on Manhattan’s Upper East Side; a $11.57 million refinance loan for a 61-unit portfolio comprised of six mixed-use buildings in the South Bronx; acquisition financing totaling $10.25 million for an 8,900-square-foot, four unit, mixed- use property in the Flatiron neighborhood of Manhattan; a $6.65 million refinance loan for a mixed-use retail property in South Norwalk, CT; two construction loans in Brooklyn; and a number of other refinancing and acquisition loans.

“Borrowers securing permanent loans are essentially locked into today’s rates for the next five years, so we’re seeing some clients opting for floating rates because short-term rates—specifically SOFR—are dropping in tandem with the fed funds rate,” Swerdlow said. “This trend benefits bridge debt and construction borrowers, making it a favorable time for these types of loans.”

Swerdlow noted that the gap between permanent financing and bridge financing is narrowing. “Bridge financing is still more expensive, but as that gap shrinks, it becomes easier to justify, especially with the non-economic benefits that bridge financing offers,” he said.

What to Expect in 2025

The recent flurry of activity we’ve seen over the last few months is an indication that investors believe the worst is behind them and now is the time to get back into the market. We expect to see that this renewed optimism will result in strong momentum for the commercial real estate market into 2025.