On September 17, the Federal Reserve cut its benchmark interest rate by 25 basis points to a range of 4.00%–4.25%, marking its first rate cut since late 2024. With markets pricing in near certainty of additional cuts through year-end, real estate investors, developers, owners and managers now face a window of opportunity to reassess their portfolios, refine their strategies and position themselves for a more favorable financing environment.
What Happens to Real Estate When the Fed Cuts Rates
The most immediate impact of a rate cut is lower borrowing costs, which make debt financing more attractive. These lower costs trigger broader changes as deal structures evolve, competitive dynamics shift and more capital flows accelerate.
As the market begins to absorb lower rates, a few key shifts are likely to take shape:
- Lower borrowing costs: Floating-rate debt becomes more affordable immediately, while new fixed-rate loans are offered at improved rates. The resulting cash flow savings may be redirected to operational improvements or value-add initiatives.
- Mortgage rate movement: While the Fed doesn’t directly set mortgage rates, its decisions influence bond markets and Treasury yields. If long-term rates decline, mortgage and commercial loan rates often follow, though typically with a lag in timing.
- Refinancing opportunities: Lower rates create more favorable conditions for refinancing, especially for those with loans nearing maturity or with floating rates. Owners who locked in financing at peak rates now have an opportunity to restructure debt at more competitive terms.
- Increased competition and valuation shifts: Lower rates typically bring more buyers into the market, increasing transaction volume and creating more competitive bidding environments. As financing becomes more accessible and demand strengthens, property values may also rise.
- Reopened development pipelines: Projects that were previously paused due to high borrowing costs may now warrant reconsideration, particularly where construction financing represents a major cost component.
Real estate tends to respond gradually to market shifts, and the full effects may take some time to unfold over the coming months. Impacts will also vary by sub-sector, geography and asset type, making it essential to monitor how specific markets respond.
Strategic Priorities for Real Estate Owners, Developers and Investors After Rate Cuts
With the possibility of additional rate cuts before year-end, now is the moment to stress-test assumptions and recalibrate strategy.
Strategies for a lower-rate environment include:
- Reevaluate Acquisition and Development Plans
Revisit pro formas and cost assumptions from projects that were not financially viable when financing costs were higher. Pay attention to development projects, where interest costs during construction can represent a substantial portion of total project expenses. - Engage Financing Partners Early and Strategically
Banks and lenders are likely to adjust their strategies based on portfolio needs, risk appetite and competition. While underwriting standards may change, early engagement with lenders provides visibility into evolving terms and helps maintain competitive positioning. - Build Flexibility into Financial Models
Rate changes affect multiple variables simultaneously. Revise budgets and cash flow projections to reflect current financing costs and model various scenarios. Consider how compressed cap rates or shifts in market timing could impact returns. - Strategically Redeploy Cashflow
As debt service costs decline, deploy savings into operational improvements or repositioning initiatives that enhance asset value and strengthen returns. - Coordinate Tax Planning with Capital Decisions
As transaction and refinancing activity increase, coordinate tax strategies alongside financing moves. Consider cost segregation studies for acquisitions, evaluate 1031 exchanges for dispositions and factor tax implications into deal structures and timing decisions.
These strategies provide a framework for action, but not every market will respond in the same way. Staying attuned to local trends, competitive dynamics and market fundamentals will be essential to identifying genuine opportunities and managing risk effectively.
Risks to Monitor as Interest Rates Decline
After navigating one of the sharpest rate-hiking cycles in decades, the potential opportunities from lower borrowing costs come with a set of considerations and caveats as the market absorbs the impacts. Competition for assets could intensify, potentially driving valuations higher, and the Fed’s path forward may be influenced by factors such as economic shifts or inflation trends. Ultimately, the months ahead will require striking a balance between opportunity and foresight. Decisions made now will help shape competitive positioning for years to come.
Guidance for Real Estate Decision-Makers
Grassi’s Real Estate advisors can help property owners, developers, investors and management companies respond strategically to market shifts through integrated support across tax planning, financial modeling, strategic planning and more. To discuss how these rate changes may impact a portfolio or business strategy, contact a Grassi advisor or reach out to Evan Fox, Real Estate Tax Leader and Partner.
Frequently Asked Questions
How do Fed rate cuts affect real estate? Fed rate cuts lower borrowing costs, making debt financing more attractive. This typically leads to increased transaction activity, more competitive bidding for properties and improved conditions for refinancing existing loans.
Will mortgage rates go down when the Fed cuts rates? Not necessarily immediately. Mortgage rates follow the 10-year Treasury yield more closely than the Fed’s benchmark rate. However, Fed rate cuts often signal to bond markets that rates are trending lower, which can eventually pull mortgage rates down over time.
How do lower interest rates impact property values? Lower borrowing costs typically increase buyer demand and can drive property valuations higher through cap rate compression. However, the effect varies significantly by market, asset class and local supply-demand dynamics.
What risks should real estate professionals watch for in a lower-rate environment? Key risks include increased competition driving valuations beyond fundamentals, potential market volatility if economic conditions shift, and the possibility that the Fed could pause or reverse rate cuts. Different markets will respond differently to changes in rates.
Why is aligning tax planning with investment strategy important in a lower interest rate environment? Decisions about acquisitions, dispositions, entity structures and debt refinancing all have tax implications that should be evaluated before deals close — not after. Coordinating tax strategy with capital decisions upfront can help optimize strategy across the portfolio.
