The Fed’s messaging indicates it may further lower rates. 

“The Fed’s latest quarterly economic projections indicate a further 0.50% Fed ease by the end of 2024, and another 1.00% total reduction by the end of 2025,” said Mike Kraft, Commercial Real Estate Treasurer for Commercial Banking at JPMorgan Chase. “Right after the FOMC announcement, the Fed funds futures market went a bit further, seeing about an 80% chance of a 0.75% decrease in 2024 and a 1.25% total reduction in 2025.”

"It’s important to remember the easing cycle will take place over time, and any future cuts will be predicated on incoming data," said Ginger Chambless, Head of Research for Commercial Banking at JPMorgan Chase. “If upside inflation risks continue to ebb as we expect, the pace of Fed cuts can be relatively brisk.”

The possibility of a recession

The Fed’s goal remains balancing employment with inflation to create a soft landing. But a recession is still a possibility. “Recession estimates have ticked up a little recently but are relatively low. We are mostly focused on further cooling in labor market conditions,” Chambless said. “So far, it looks like normalization, not deterioration.”

“While investors are eager for interest rates to drop, you have to remember that moderate cuts make sense as the economy cools and inflation decreases,” Brooks said. “If investors are hoping for severe interest rate cuts, they’d need to see a severe recession.”

How cuts could impact adjustable and fixed interest rates

The Fed’s interest rate reduction directly impacts adjustable-rate mortgages indexed to short-term rates, such as SOFR or Prime.

“It’s tempting to think that if the Fed were to lower its target rate by 1.50%–2.00% over the next year or so, we’d see similarly lower Treasury yields and mortgage rates,” Kraft said. 

But fixed interest rates work to build in all future Fed activity, the long-term economic outlook and inflationary expectations—not just what happens at next FOMC meeting.

The Fed’s actions don’t directly affect fixed rates, which are linked to long-term inflationary expectations. Economic data, such as consumer spending and jobs reports, are more likely to shift these medium- to long-term fixed rates than interest rate reductions.

“For borrowers interested in locking in an attractive fixed rate, opportunities are out there right now,” Kraft said. 

What lower interest rates could mean for multifamily investors

Rate decreases impact multifamily and commercial real estate in other ways, too. Most notably, liquidity increases across the financial system.

“With rates rising faster and higher than in recent memory, cash flow coverages on many deals have gotten skinnier,” Brooks said. “As a result, commercial real estate lenders have had to take out additional reserves against their portfolios.”

“As interest rates decrease, cash flow coverage increases, bringing down loan loss reserves for banks," he said. "Lower reserves can then be put back into the market and facilitate more deal flow.”

Increased liquidity and lower borrowing costs often lead to rising prices, which may alter apartment building values. “It’s not dollar-for-dollar, but as interest rates decrease, cap rates usually fall a little bit with them,” Brooks said.

Lower rates present multifamily investors with many opportunities, including:

• Refinancing properties: Falling rates can be especially beneficial for investors with loans near the end of their term. By refinancing, investors can lower their monthly payments and potentially save thousands of dollars in interest. Property refinancing can also help improve cash flow and free up capital for renovations or new building purchases.
• Growing their rental portfolio: “Valuations have calmed down a lot,” Brooks said. That’s especially true in larger markets such as Los Angeles, New York and San Francisco, where the cost of living tends to be higher and there’s a naturally large pool of renters. Aside from expanding to new markets, multifamily investors can add new asset classes to their portfolios, such as mixed-use, retail and industrial properties.

Higher-for-longer interest rates are relative, something particularly evident over the last 20 years. 

“The extremely low rates seen not long ago should be viewed as an anomaly stemming from the 2008 Great Financial Crisis and COVID,” Kraft said. “Near-zero interest rates are unlikely to return.” It may take investors and consumers some time to adjust to the new landscape.