At its first meeting of the year, the Federal Open Market Committee unanimously voted to keep the federal funds rate steady at 4.25% to 4.50%. This follows three previous rate cuts totaling a full percentage point, though Treasury rates have not declined at the same pace. While inflation has eased significantly, it remains above the Fed’s 2% target. In December, Total Personal Consumption Expenditures (PCE) rose 2.6% year-over-year, while core PCE, which excludes food and energy, increased by 2.8%.

Fed Chair Jerome Powell said based on the current economic indicators, there’s no need to rush to change monetary policy at this time. “If the economy remains strong and inflation does not continue to move sustainably toward 2%, we can maintain policy restraint for longer,” he said. “If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.”

Market Reaction

“Today’s announcement was anticipated after the Fed’s December meeting projected only two rate cuts in 2025,” said Matt Dzbanek, Senior Director in the Capital Services Group at Ariel Property Advisors, a member of GREA. “The Fed has managed expectations well, which has allowed investors to better predict short-term rate fluctuations, leading them to make decisions more confidently. Therefore, we expect the robust commercial real estate activity we saw in 2024 to carry into the new year.”

Rise in Investment Sales Activity in 2024 Despite Elevated Rates

Last year, mortgage maturities in the U.S. reached $950 billion, and this year will approach $1 trillion, pressuring owners to work with lenders to modify loans, refinance at a higher rate, inject capital or sell. This trend is driving price adjustments for owners forced to sell and creating opportunities for buyers to acquire assets at a discount.

Lower prices contributed to nationwide office sales climbing to $63.6 billion in 2024, marking a 20% year-over-year increase, and multifamily sales rising 22% to $146 billion, according to MSCI data.

In Manhattan, where the average price per square foot dropped 16%, office sales surged 74% year-over-year to $5.11 billion in 2024 and transactions jumped 77%, as reported by Ariel Property Advisors. Of the 55 office transactions in Manhattan, 50 involved Class B and C buildings, primarily acquired by owner-users or investors looking to reposition assets. Additionally, $2.3 billion of the $3.22 billion in Manhattan development sales came from office buildings purchased for conversion to residential use or for demolition and ground-up residential development.

Across New York City, multifamily sales rose 14% year-over-year to $8.9 billion in 2024. Free market buildings accounted for 63% of the multifamily dollar volume last year with 8% for affordable housing and 29% for rent regulated properties, which are trading at 35-60% below the 2017-2018 peak.

Rate and Pricing Certainty Driving Transactions

“Acquisitions slowed for years due to uncertainty over rates and pricing,” Dzbanek said. “Now, with stable rates and increased sales activity, investors have greater confidence when valuing properties and are more comfortable making transactions.“

Dzbanek said the Capital Services Group arranged $100 million in financing for clients in recent months, including 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.

Other notable financings by the Group included $9 million in joint venture equity for the acquisition of a 100,000-square-foot, 111-unit mixed-use property in New Jersey, and a $5,362,500 acquisition loan for Nevin Place Apartments, a 56-unit affordable housing property located in Charlotte, NC.

Lending Landscape Going Forward

“As we enter the next cycle, we expect 'extend and pretend' to be used less frequently, as lenders focus on cleaning up their books, managing risk more effectively and encouraging borrowers to refinance with new loans at appropriate valuations,” Dzbanek said.

As deals become more attractive from a value perspective, Dzbanek said he anticipates more capital will be available for acquisitions, with lenders re-entering the market and tightening their spreads to stay competitive and win deals. For example, he just priced out a low leverage multifamily opportunity at 102 bps above the 10-year Treasury.

Moreover, with rate declines projected over the next 18 to 24 months, investors are likely to avoid locking in rates for five, seven, or ten years, if possible, instead opting for transitional capital.

“We envision floating rate debt options being widely utilized in 2025 for several reasons, including non-recourse loans, more flexible underwriting, faster execution and the ability to bypass strict depository relationships, Dzbanek said. Moreover, the shrinking rate delta further enhances their appeal.“