How Will the Fed's Interest Rate Cuts Impact Retail Real Estate?

Yesterday, the Federal Reserve met for the final time of the year and as expected, the central bank announced its decision to cut the federal funds rate by 0.25 percentage points—bringing it to a range of 4.25% to 4.5%.

This was the third consecutive rate cut in 2024 (the first two being a 0.5 percentage point reduction in September and a 0.25 percentage point reduction in November).

Is a Rebound Upon Us?

After a sharp increase in interest rates from an average of 3.5% to over 7% in two years, rates are finally coming down—a full percentage point as we head into a brand-new year. U.S. retail sales increased more than expected in November 2024 too, according to the Commerce Department.

Those of us in retail and retail real estate welcome this news, as it indicates that better days—and more optimal business conditions—are ahead. 

Although interest rates are still higher than they were in the 2010s, this latest interest rate cut should make more real estate transactions viable. During its December 18, 2024, announcement, the Fed also summarized its economic projections for 2025, including:

• Two additional rate cuts in 2025 of 0.25 percentage points each
• Federal funds rate: 3.9% by the end of 2025
• Unemployment: 4.3% by the end of 2025
• Personal consumption expenditures inflation: 2.5% by the end of 2025
• GDP growth: 2.1% for 2025

With President-elect Donald Trump taking office in January 2025, there are several policy changes that are expected to impact the economy. EY shared just after the election last month these major economic predictions:

1. Looser financial conditions and deregulation could be catalysts to stronger business investment and spending.
2. Heightened policy uncertainty could be a hindrance to greater private sector activity.
3. Immigration, tax and trade policy changes will likely have an impact on the economic and inflationary outlook in late 2025 and beyond.

Time will tell how these new policies will impact the overall economy and different industries.

The Impact on the CRE Market

For shopping center developers, this week’s interest rate cuts could present a few opportunities in 2025:

• Refinancing – If you’re nearing the end of a term and want to decrease your monthly payments and free up cash for renovations or real estate purchases, these cuts are well timed.
• Lower borrowing costs for construction loans – If you want to expand to new markets or expand your portfolio of retail investments, this recent cut is helpful—especially in the short term.

It will take time for the most recent interest cut to trickle down to everyday consumers. However, this rate reduction should continue to boost investor sentiments. CRE investors can feel more confident about their ability to refinance or recapitalize, and brokers working with property owners and retailers may see a pickup in deal activity as a result.

Looking Ahead with Optimism

There’s no question: 2024 has been a year of holding our collective breaths. Now that the presidential election is behind us and the Fed has lowered interest rates, it seems reasonable to expect more activity in the commercial real estate market in the U.S.

Whether you’re a growing retailer that has been holding on expansion plans in the past year or you’re a broker working with retailers, you’re probably feeling the same as we are. Cautiously hopeful…and eager to see how it all unfolds. If SiteSeer can support you in 2025 and beyond, contact us. We’d be happy to discuss how the SiteSeer platform can help you plan for growth and optimize your portfolio (if you’re a retailer) or better serve your real estate clients (if you’re a broker).