Market Summary 8.18.25

Inflation Still Looks Tame – Should the Fed Cut Rates?

The latest Consumer Price Index (CPI) data indicates a year-over-year inflation rate of 2.7%, suggesting that inflationary pressures are not intensifying. Despite this, core inflation remains elevated at 3.1% annually, driven by persistent service sector costs, including medical services and shelter. These underlying pressures complicate the Federal Reserve's decision-making process regarding potential interest rate cuts.

Market expectations are leaning toward a quarter-point rate cut in the upcoming September Federal Open Market Committee (FOMC) meeting. This anticipation is influenced by factors such as subdued inflation and a cooling labor market. However, the Fed faces a delicate balancing act, as a rate cut could signal confidence in economic stability, but a premature move might exacerbate inflationary trends. In the current environment, commercial real estate investors are experiencing favorable financing conditions. The prospect of lower interest rates is compressing financing spreads, making capital more accessible. This is particularly advantageous for sectors like multifamily and industrial properties, where demand remains robust, and borrowing costs are a critical factor in deal viability.

However, the office sector continues to face challenges, with high vacancy rates and subdued leasing activity. Investors in this segment may find that rate relief alone is insufficient to overcome structural headwinds. Similarly, discretionary retail spaces are experiencing slower leasing momentum, despite favorable capital conditions. As inflation moderates and rate expectations stabilize, investors are advised to focus on long-term fundamentals rather than short-term rate fluctuations. Assets located in high-demand corridors with durable tenant bases are likely to attract renewed competition, especially as development pipelines shrink and replacement costs rise. For those prepared to act during this transitional phase, the current environment presents a unique opportunity to secure quality assets ahead of a broader market resurgence.