What does the rate cut mean for commercial real estate development?

The Federal Reserve’s move to cut the federal funds rate by 50 basis points is an important marker in the fight against inflation and signals new opportunities for commercial real estate. While select development opportunities are available at all stages of the real estate cycle, an easing interest rate environment is particularly favorable for development right now due to cyclical dynamics like falling new supply, healthy market demand and moderating construction costs.

Nevertheless, we remain highly selective on prospective development opportunities, preferring property sectors and markets benefitting from both long-term structural economic trends and short-term supply and demand dislocations.

Specifically, we have been tracking a significant slowdown in new construction starts over the past 12-18 months. This is more a result of higher borrowing costs than decreased market demand, especially in the residential sector where absorption has recently been solid despite higher rates. 



Coincident with the slowing national construction pipeline, our latest U.S. Construction Trends report found that construction cost inflation has fallen below 3% for the first time since the beginning of 2021. Contractors are also noting that project schedules are improving and that most projects are being delivered on time. It should be noted that this occurred prior to the Fed’s September 18 interest rate cut. With more rate cuts on the horizon, the development climate is now more stable than it has been in over three years. The fact that cap rates have stabilized and are edging down provides further cyclical support for development profitability. 


The Fed’s September rate cut signifies not only a reduction in financing costs but also, more importantly, a shift in the commercial real estate narrative. Over the past four years, pandemic-driven disruptions, inflationary pressures and elevated borrowing costs have diverted attention from the market’s underlying demand for modern, efficient and strategically located space. In fact, the lag in new construction has created a greater need for properties that can meet rapidly evolving technology changes, shifts in demographics and consumption patterns as well as renter preferences.