Tariffs, GDP Slump, and a Fed Rate Cut: CRE’s Next Big Move?

Tariffs, GDP Gloom, and a Fed Rate Cut: Boom or Bust for CRE?

Introduction: A Shaky Economy Meets Tariff Turbulence

Last week, we explored a 3-6-9-month economic forecast for commercial real estate (CRE), spotlighting trends in the financial sector. Now, fresh data reveals Q1 2025 GDP contracted by 0.3%—before new tariffs even kicked in. With tariffs set to hit in Q2, potentially deepening the economic slowdown, the Federal Open Market Committee (FOMC) meeting on May 6-7, 2025, takes center stage. Will the Fed respond with a surprise rate cut to counter the gloom? And what would that mean for CRE investors? Let’s dive into the data, weigh the pros and cons of a rate cut, and chart the path ahead.

The Economic Backdrop: GDP Slump and Tariff Fears

The Q1 GDP contraction, driven by declining consumer spending and a 40% drop in cargo volumes from China, caught markets off guard. Worse, Q2 could be bleaker as tariffs—expected to raise costs on imports—begin to bite. Key indicators:

Inflation Outlook: Core PCE inflation is projected at 2.8% for 2025, above the Fed’s 2% target, with tariffs likely to push consumer prices higher.
Consumer Sentiment: March 2025 saw consumer inflation expectations spike to levels not seen since 1993, per recent surveys.
Political Pressure: Tensions between President Trump and Fed Chairman Jerome Powell, noted in X posts, fuel speculation of a rate cut to appease growth concerns, despite Powell’s insistence on FOMC independence.

Could this perfect storm force the Fed’s hand? Let’s explore the case for a rate cut and its implications for CRE.

Will the Fed Cut Rates? The Tariff-GDP Squeeze

The FOMC maintained rates at 4.25%-4.50% in March 2025, projecting two 25-basis-point cuts by year-end. However, the pre-tariff GDP contraction and Q2 tariff risks shift the calculus:

Case for a Cut: A worsening Q2 GDP, potentially dipping to -0.5% or lower per early economist estimates, could signal recession risks, pushing the Fed to act preemptively. Lower rates could stimulate borrowing and investment, critical for CRE.
Case Against a Cut: Tariffs are inflationary, and a rate cut might exacerbate price pressures, especially if consumer inflation expectations keep rising. The Fed may opt to hold steady to avoid signaling panic.

A surprise cut, perhaps 25 basis points, seems plausible given the GDP trend, but it’s not a slam dunk. What would it mean for CRE?

Pros of a Rate Cut: A CRE Lifeline

A rate cut could supercharge CRE, especially in a tariff-heavy economy. Here’s how:

Lower Borrowing Costs: Even a 25-basis-point cut reduces cap rates, lifting property valuations. Post-Great Financial Crisis data shows CRE valuations rose 8-12% after rate cuts.
Refinancing Surge: With $37.24 billion in CMBS origination in Q1 2025, lower rates could ease refinancing for properties facing loan maturities, particularly in multifamily and industrial.
Sector Boost: Medical office and apartments, with high occupancy and limited new supply, are primed to benefit as investors chase yield.

Pro Example: A multifamily property with a $10M loan at 5% could save $25,000 annually in interest per 25-basis-point cut, boosting cash flow and appeal to buyers.

Cons of a Rate Cut: Consumer and Inflation Risks

However, a rate cut isn’t all rosy, especially with tariffs looming:

Consumer Confidence Hit: A cut could signal economic weakness, further denting consumer sentiment already rattled by tariff-driven price hikes. Retail and lodging CRE could suffer as spending slows.
Inflation Spike: Tariffs are expected to add 0.5-1% to CPI in Q2, per economic models. A rate cut might amplify inflation, forcing the Fed to reverse course later, roiling markets.
Office Sector Pressure: If tariffs and a GDP slump lead to layoffs, office demand could weaken further, with vacancy rates already hovering at 18% in major markets.

Con Example: A retail center reliant on consumer spending could see occupancy drop if tariff-induced price increases curb discretionary purchases.

3-6-9 Month Outlook: Navigating the Tariff-Rate Dance

Assuming a 25-basis-point cut in June 2025, here’s a CRE forecast:

3 Months (Q3 2025): Refinancing accelerates in multifamily and medical office. Transaction volumes rise 5-7% as investors lock in lower rates. Retail struggles with tariff-driven spending dips.
6 Months (Q4 2025): Industrial and apartment valuations climb as cap rates compress. Inflation pressures from tariffs may cap further cuts, stabilizing rates.
9 Months (Q1 2026): CRE activity surges if GDP stabilizes, but persistent inflation or a deeper consumer slowdown could hit retail and office harder.

Actionable Takeaways for CRE Investors

Prioritize Resilient Assets: Target medical office and multifamily properties with strong fundamentals to weather tariff impacts.
Secure Financing Early: Lock in low-rate loans before potential inflation-driven rate hikes in late 2025.
Track Tariff Effects: Monitor import prices and consumer spending data to gauge retail and lodging risks.

Opportunity Amid Uncertainty

The Q1 GDP contraction, pre-tariff, sets a grim stage for Q2, where tariffs could deepen the slowdown. A surprise Fed rate cut could be a lifeline for CRE, slashing borrowing costs and boosting valuations, but it risks fueling inflation and spooking consumers. By focusing on resilient sectors and staying vigilant, CRE investors can turn uncertainty into opportunity. What’s your bet on the Fed’s next move? Share your thoughts below, and join us next week for more CRE insights!

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CONTACT: David Goldman
dgoldman@goldmanfinancialgroup.com