How Will A Second FED Rate Cut and Trump Presidency Affect CRE?

It was predicted that 20% or $950 billion of commercial real estate (CRE) loans were set to mature in 2024. And now that we’ve passed the election and are ending the year, it’s time to assess where we stand.

Now, in the wake of a Trump election victory and the Federal Reserve's unexpected second rate cut, questions loom over the market's direction. Read on to get answers to hot-button items like:

• Will this rate cut deliver the needed relief, or does it highlight the deeper challenges that lie ahead?
• What will the landscape look like for CRE loans that were previously extended when they reemerge?
• Will Trump’s presidency bring the type of economic policies that stabilize the commercial real estate market, or will it add new complexities to an already fragile sector?

This environment is characteristic of an Office Apocalypse. Take the test to see how well your portfolio is positioned to succeed. 

Where We Stand

A second rate cut is a step in the right direction, but it comes on top of a nearly trillion dollar house of cards.

This year, the Federal Reserve reduced rates twice, an unexpected move aimed at stabilizing ongoing financial challenges. Of the estimated $950 billion in commercial real estate (CRE) loans set to mature in 2024, many had already been delayed or modified to prevent defaults.

However, the persistent pressure from a tightening credit environment—driven by high interest rates and banks' reluctance to lend—continues to create significant refinancing challenges for borrowers.

And although last year’s rallying cry in real estate circles was to “survive until ’25”—a hope that market conditions would stabilize by then—a much longer ride may be in store for commercial landlords. In fact, with the wall of maturities continuing to climb with “extend and pretend,” it may not be until 2028 that we start to see real relief.

This is a reminder that the CRE market’s struggles will exist after the rate cuts, and the real work to stabilize the sector is just beginning.

High Rates Among CRE Loans

At the start of 2024, there were hopes for the Federal Reserve to cut rates six times to ease inflation and relieve financial pressure on sectors like commercial real estate.

By November, only two cuts have occurred: 50 basis points in September and 25 in November.

And while we’re finally heading in the right direction, this slower-than-expected pace has affected refinancing options, borrowing costs, and overall market liquidity.

But it’s not just the Fed holding all the cards here. The bond market plays a critical role in shaping borrowing costs, particularly for commercial real estate. 

The Bond Market and National Debt  

The bond market’s power over borrowing costs is due to the inverse relationship between bond prices and interest rates—when bond prices climb, rates drop, and when prices fall, rates spike. 

Now throw in mortgage and loan rates, which are tightly linked to Treasury yields, especially the 10-year Treasury bond, which serves as a benchmark. 

High yields on these bonds exert upward pressure on borrowing costs, leaving little room for relief. Moreover, investor behavior amplifies this effect; attractive Treasury yields draw capital away from other markets, further driving rates higher and tightening financial conditions across the board. 

The soaring U.S. national debt intensifies this challenge. High debt drives demand for government bonds as safe assets, pushing prices up and keeping rates elevated. 

The Federal Reserve’s bond-buying activity, intended to manage economic conditions, amplifies this effect by pushing prices even higher. On top of this, concerns about inflation tied to the growing debt prompt investors to lock in current yields, adding yet more upward pressure on bond prices. 

So, without addressing the debt crisis, borrowing costs will remain high, limiting the Fed's ability to lower rates effectively. And this brings us back to all of those office landlords in debt.

Landlords are in Deep Debt

Many office landlords entered 2024 hoping for rapid rate relief that would make it easier to refinance or extend their current debt under less restrictive terms. Instead, for the greater part of the year, they’ve faced extended high-interest burdens with limited refinancing options, compounding the effects of already high vacancy rates and declining property values.

For offices, occupancy rates hover around 50%, while vacancy rates surpass 20% in many major cities. It does not pencil for banks to take risks on these numbers, and they are raising requirements.

Not only this, but CRE loans are typically around 2-3 percentage points above the prime rate; meaning if the prime rate is 7%, a CRE loan might be priced at 9-10% depending on the lender, loan type, and borrower's creditworthiness. 

This rate jump has created a refinancing shock, where properties that could once meet debt coverage requirements are now struggling under tighter lending conditions.

Because with NOI from landlords dropping steeply, banks have been reluctant to even entertain refinancing, often raising loan-to-value (LTV) requirements to 60% or even 50% equity—drastically higher than pre-pandemic levels.

What Happens to Failing Landlords?

Up until this point, many distressed landlords who couldn’t secure refinancing at sustainable rates were forced into asset sales at heavily discounted prices, a trend that could further depress market valuations and liquidity.

Or on the other end, some landlords have opted to hand the keys back, walking away from properties that are underperforming or saddled with untenable debt costs. As more landlords choose to offload properties at a loss rather than commit to refinancing with steep rates and uncertain tenant demand, it is reshaping the struggling office sector.

With defaults mounting, banks also face potential losses, and distressed asset sales may further reset property valuations at lower levels, adding pressure to an already cautious lending environment. And the scale of these defaults is massive. Most recently, Brookfield defaulted on $1 billion of commercial real estate loans.

And now we come back to the $950 billion hole of debt that was estimated to cave in by the end of 2024. The number has gone up exponentially in recent years, now at a 28% increase from $729 billion in 2023, according to SP Global. This figure is expected to peak in 2027, unless something major is done.

Could a Rate Cut Save Dying Landlords?

Due to forecasts placed in September, we may be in for another 25-basis point cut before the end of the year, followed by an additional 100 basis points in 2025. But is it too late for these changes to solve challenges posed to the CRE markets?

With large scale titans defaulting rapidly at the same time WFH devalues office space, has the damage been done?

High-profile defaults, like Brookfield’s $1 billion loan default, demonstrate the scale of the problem. The ripple effects of absorbing these loans could destabilize the broader financial system, raising concerns about the adequacy and timing of any intervention. Rate cuts may offer temporary relief, but for many landlords, fundamental market challenges could make even reduced rates insufficient to reverse the tide.

Future of a Trump Administration

As a new Trump presidency looms, questions arise about how it might shape the already precarious CRE landscape.

While the Federal Reserve’s new rate cut aimed for short-term economic stabilization, many analysts wonder if this intervention is sufficient for landlords facing steep challenges.

A return of Trump to the White House could usher in policies focused on deregulation and tax incentives, which might stimulate certain segments of the market. Historically, Trump has supported lower interest rates to spur growth, especially in sectors like real estate that are highly sensitive to borrowing costs. However, the critical question is whether these measures can effectively address deeper structural challenges within CRE, such as high vacancy rates, changing loan-to-value (LTV) requirements from lenders, and declining net operating incomes (NOI).

For commercial landlords, further rate cuts beyond the Fed's forecasted 100 basis point reduction by the end of 2025 could offer some relief. In this speculative environment, where additional rate cuts may become more frequent, tenants could find new opportunities to negotiate favorable lease terms and concessions as landlords work to maintain occupancy levels. However, high vacancy rates and weak NOI figures will continue to challenge landlords, forcing them to balance tenant incentives with financial sustainability.

Not only this, but with the bold idea to tackle one of the root causes of high borrowing costs: government waste, Trump’s alternate route may minimize the threat of high national debt. The former president recently announced the creation of a Department Of Government Efficiency (DOGE), appointing Elon Musk and Vivek Ramaswamy to lead this initiative. 

The DOGE’s mission is to identify and eliminate waste in the federal budget. By reducing unnecessary expenditures, the government could curb the national debt, relieving some of the pressure on the bond market and helping bring interest rates down. 

As Trump noted, “The key to lowering rates isn’t just what the Fed does—it’s fixing the inefficiencies that drive our debt higher.”  

On the flip side, Trump’s proposed economic policies could have inflationary consequences. Goldman Sachs economists estimate that his proposed tariffs—including a 10% tariff on Chinese imports and taxes on autos from Mexico—could push inflation back up to 2.75% to 3% by mid-2026, potentially adding new pressures to an already volatile market.

Takeaways for Tenants

Tenants should recognize that the challenges facing landlords—like high vacancy rates, tightening lending conditions, and growing debt burdens—create opportunities for savvy lease negotiators. If the Fed’s rate cuts continue, landlords may offer more concessions and flexible terms to retain tenants and fill empty spaces. But with financial pressures mounting, tenants should be prepared for a competitive environment where the best deals may require proactive negotiation.

While the road ahead remains uncertain, tenants who are prepared to capitalize on market volatility could secure favorable terms. So, ask yourself: Can your CRE portfolio survive the office apocalypse?

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