The term “higher for longer” first emerged in 2022 and became a fixture in 2023, as the Federal Reserve opted to keep the Effective Federal Funds Rate (EFFR) elevated in an attempt to combat inflation.
The quarter-point rate cut in September might be the start of an EFFR reduction. However, a Lee & Associates report, “What Higher For Longer Really Means for CRE Investment in 2025,” suggests that the long-time elevated EFFR means that “Borrowers, owners and investors are navigating an environment where elevated rates are not a temporary headwind but a defining condition.”
As a result, development, leasing and capital decisions are more conservative, selective and regional, the Lee & Associates analysts said.
Consistent Rates and Structural Pressure
Inflation has moderated in the energy and goods sectors. Not so much when it comes to housing and services. The report stated that Fed Chair Jerome Powell noted that the persistent core inflation rate of 3.1% and the headline inflation rate of 2.9% are above the Fed’s 2% target.
As a result, CRE investors continue to behave as if the economy remains in a higher-for-longer environment. Lenders want NOI stability, robust sponsorship and conservative leverage. Meanwhile, borrowers are opting for shorter loan terms, tighter spreads, and stricter covenants.
“While the recent rate cut may ease short-term borrowing costs, it’s unlikely to shift lender behavior or valuation discipline without further reductions,” the report said.
Then There’s Refinancing
While worries about maturing CRE debt aren’t new, Lee & Associates analysts explain that its professionals report “a growing wave of short-term extensions, as lenders and borrowers try to reconcile current values with peak-era underwriting.”
Additionally, approximately $1.5 trillion in CRE loans are scheduled to mature by the end of 2025. “Properties acquired at aggressive pricing are confronting major loan proceed shortfalls, especially where NOI has flatlined,” the report noted. This means borrowers are faced with strategic sales, discounted payoffs or default.
Advice for the “New Normal”
While some hope that the Fed’s recent rate cut could mean “a looser monetary path, (the) current reality still demands disciplined strategy,” Lee & Associates’ analysts noted.
As a result, successful investors are:
- Prioritizing in-place cash flow
- Relying on operational execution to unlock value
- Understanding the exit before entry
- Being more creative with the capital stack
- Targeting value-add plays that make sense
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