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Interest Rates: 2025 vs. 2026 and the Current Outlook

By: Scott Williams

The interest rate environment in 2025 ultimately delivered meaningful relief after an extended period of elevated yields. However, for commercial real estate investors, the timing, volatility, and reliability of those moves proved just as important as the absolute decline in rates.

While long-term Treasury yields finished the year materially below their highs, shifting expectations around Federal Reserve policy and episodic market disruptions limited the impact of lower rates on transaction activity for much of the year.

The Fed’s Actions and Market Interpretation in 2025

Over the course of the year, the Federal Reserve delivered three 25-basis-point cuts to the Fed Funds rate. These moves provided meaningful relief to short-term fixed and floating rates, while also contributing to improved long-term fixed-rate pricing.

Importantly, while markets broadly anticipated three cuts entering the year, the Fed’s December 2024 projections called for only two. Internal debate within the FOMC remained elevated throughout 2025, and shifting guidance created friction between market expectations and policy execution.

As a result, rate relief arrived later and with less certainty than many investors had hoped. While borrowing conditions improved toward year-end, the lack of early-year clarity limited transaction volume for much of 2025. Borrowers and buyers who were able to delay activity until the fourth quarter generally benefited from more favorable and predictable conditions.

Early 2026: A More Constructive Starting Point

Seven days into the year and there have already been some major geopolitical surprises, but to date, they have not materially disrupted the bond market. The 10-year Treasury has remained relatively stable in the low-4% range following the Fed’s December meeting, holding levels well below much of what investors experienced throughout 2025.

Historically, a 4.0% 10-year Treasury has served as an important psychological and underwriting threshold for commercial real estate investors. Sustained levels at or below this range have the potential to materially improve borrowing assumptions and support increased transaction activity, particularly if volatility remains contained.

The Fed’s 2026 Outlook: Dispersion and Uncertainty

The Fed’s current projections for 2026 reflect an unusually wide dispersion of views among policymakers. The median forecast implies only one rate cut for the year — a projection supported by just four of the nineteen FOMC participants.

Notable:

• Three members project a rate increase in 2026
• One member projects as many as six cuts

This degree of divergence highlights the challenges the Fed faces as it navigates lagging economic data, revised employment figures, and disruptions caused by recent government shutdowns. Chair Powell has described recent policy debates as “spirited,” a characterization consistent with the current dot plot.

Adding another layer of uncertainty, Jerome Powell’s term as Chair ends in May 2026. Markets broadly expect a new appointee to lean more dovish, potentially increasing the odds of additional easing. However, structural constraints within the FOMC remain important — twelve members vote on policy decisions, and only one current voting member is scheduled to rotate off in 2026.

Market Pricing for 2026 Rate Cuts

Despite dispersion within the Fed’s projections, market pricing has remained comparatively stable. Currently, futures markets imply approximately two rate cuts in 2026, with the first expected around June and a second projected for September.

That said, expectations remain probabilistic rather than definitive. Roughly a quarter of the market is pricing three or more cuts by year-end, underscoring the sensitivity of forward expectations to incoming data and policy communication.

While the Fed’s internal outlook remains fragmented, the bond market continues to provide a clearer signal — suggesting a gradual, measured easing cycle rather than abrupt shifts in policy.

Conclusion: Rates, Expectations, and CRE in 2026

The experience of 2025 reinforced an important lesson for commercial real estate investors: expectations and volatility matter as much as absolute rate levels.

While lower Treasury yields and eventual Fed cuts provided relief, shifting guidance and episodic disruptions limited transaction momentum until rate expectations stabilized. Capital deployment responded not simply to lower rates, but to greater confidence in the forward path of policy.

Looking ahead to 2026, markets appear to be pricing a continuation of gradual easing, even as policymakers’ own forecasts reflect notable dispersion. For commercial real estate investors, this divergence underscores a familiar challenge — navigating not just where rates may settle, but how consistently that path unfolds.

In practical terms:

• Lower long-term yields improve borrowing conditions,
• But transaction volume will respond most meaningfully when volatility subsides,
• And when underwriting assumptions can be made with confidence.

In that context, the outlook for 2026 is cautiously constructive. If rate stability holds and forward expectations continue to align, the environment may finally support a broader recovery in transaction activity across commercial real estate markets.

Aline Capital’s Q4 Industrial Leasing Summary

BY: Sam Faulkenberry

Leasing momentum remains robust in the Upstate South Carolina Industrial Market, capping a strong 2025 for Aline Capital’s Industrial team. In December alone, the team successfully closed four leasing transactions, underscoring Greenville’s appeal as a prime location for growing businesses:

• PMC Commercial Interiors, a leading commercial interior design firm with locations across the Southeast, partnered with Sam Faulkenberry to pre-lease 20,300 SF at the new SouthPoint Commerce Center. This premium 227,000 SF industrial development, currently under construction, will provide the modern warehouse space needed to support their expanding Greenville operations.

• Global Medical Products, a provider of medical equipment for hospice care, selected Greenville its expansion into the Carolinas. With Aline’s representation, the company leased 8,100 SF of warehouse space at the recently completed Merovan at Donaldson, a Class A shallow bay industrial development.

• Kayak Distribution Inc., a Canada based kayak distributor experiencing rapid growth in the Southeast, secured a 10,000 SF freestanding warehouse at 509 John Ross Court to establish a strategic Greenville hub.

• A longtime client and owner of the Rutherford Business Park leased the park’s final 8,500 SF bay to Angel Auto Repair, achieving full occupancy across the 45,000 SF small-bay industrial property at competitive market rates.

These deals highlight the continued demand for high-quality industrial space in the Upstate, driven by regional growth and strategic accessibility. Aline Capital’s industrial team looks forward to building on this success in 2026.

December Rate Cut at 89% Probability – Market Projecting Two Cuts for 2026

As of this morning (12/3/2025), the market is currently pricing in an 89% probability of a December rate cut. This is up significantly from recent weeks where the probability had gotten down to about 50%.

The pullback was driven largely by Chair Powell’s post-November press conference comments, where he emphasized that there was “spirited debate” among FOMC members and that a December cut was not guaranteed. Those remarks introduced doubt around what had been a widely expected year-end easing move.

The rebound in that expectation was mostly driven by several FOMC participants speaking publicly on the matter last week, and stating that a cut in December was their base expectation, which they caveated would need to be confirmed by the data leading up to their December 10th decision.

Current 2026 Rate Outlook

Beyond December, the market is still sorting out how far the Fed will go next year. Current pricing shows the largest probability (28.3%) placed on two cuts for next year (if there is a cut in December).

Markets are also giving meaningful weight to three cuts (26.8%), with a smaller—but not trivial—camp expecting only one cut (17.1%).

Last Data Shows Inflation on the Rise

The Fed is operating in a tricky window. The government shutdown has caused a lack in significant data releases, including CPI and PPI, which are the primary reports used to measure inflation. As of now, the latest CPI data is from September, which reported an increase in inflation to 3.0% year-over-year.

Just as importantly, CPI has been drifting higher since bottoming in the low-2% range earlier this year. That makes this an unusual moment to be cutting rates while inflation appears to be re-accelerating—one reason policymakers have been more cautious lately and why markets have repriced expectations from a faster 2026 cutting cycle to a slower one.

At the same time, the Fed has been watching signs of labor market softening. But the shutdown-driven data gap makes it harder to confirm how quickly conditions are changing, which reinforces their “cut if data allows, pause if needed” posture.

What Matters for CRE Investors

A continued decline in short-term rates should help thaw parts of the CRE capital markets. Lower floating-rate costs directly benefit bridge and construction borrowers, and even 75–100 bps of cuts over the next 12 months would be a meaningful reduction in carry and development economics.

That said, the long-term fixed-rate market remains the bigger driver of values and transaction velocity. The 10-year Treasury has been notably stable in the 4.00%–4.10% range since the last Fed meeting—even while December cut expectations bounced around. After peaking near 4.80% in January, the 10-year has trended lower through 2025, bringing borrowing costs down and supporting early-stage value recovery via cap-rate compression.

Today’s 10-year level already reflects the likelihood of a December cut. The next move in long rates will depend more on how the Fed frames the 2026 path than on the cut itself. If guidance reinforces a gradual easing cycle and inflation doesn’t surprise to the upside, longer-term yields have room to drift into the high-3% range. Our base case remains a high-3% lower bound and low-4% upper bound for the 10-year in 2026—an environment that should support stable borrowing costs and continued, incremental value recovery for CRE investors.

Rate Outlook Amid Fed Uncertainty

Last week, the Federal Open Market Committee (FOMC) cut the federal funds rate by 25 basis points, bringing the target range down to 3.75%–4.00%. The move was widely anticipated, but bond yields edged higher across the Treasury curve after the announcement as markets adjusted expectations for additional cuts in December and January.

During his press conference, FOMC Chair Jerome Powell emphasized that “a December cut is not a foregone conclusion.” He noted that committee members engaged in a spirited debate over future policy—particularly regarding a potential December cut—given the mixed economic signals of slightly higher-than-expected inflation and uncertainty in the labor market. Adding to the challenge, the ongoing government shutdown has delayed the release of key economic data the Fed typically relies on to guide decisions.

Prior to Powell’s remarks, the 10-year Treasury yield hovered around 4.00%, with markets pricing in roughly a 96% probability of a December rate cut. After his comments tempered those expectations, yields rose modestly, and the 10-year settled near 4.10%. Market-implied odds of a December cut have since fallen to about 64.5%, and the 10-year appears to have stabilized around that level.

Balance Sheet Developments: A Positive Note

One encouraging takeaway for investors came from Powell’s comments on the Fed’s balance sheet strategy. The Fed announced it will stop purchasing mortgage-backed securities (MBS) and instead replace maturing MBS holdings with Treasuries. Since June 2022, the Fed has been operating under a quantitative tightening (QT) program, reducing its balance sheet, which it now plans to conclude by December 1, 2025.

This shift is broadly positive for rate-sensitive investors. As the Fed transitions to becoming a significant net buyer of Treasuries, demand for government bonds should increase, helping to suppress yields and ultimately lower borrowing costs. While the Fed’s prior MBS purchases supported mortgage and lending spreads, the new focus on Treasuries may produce an even more favorable overall effect on interest rates.

Government Shutdown: Growing Risks

Historically, government shutdowns have had minimal lasting effects on interest rates. However, the current shutdown—now entering its 36th day—is on track to become the longest in U.S. history, and its prolonged nature raises the potential for meaningful market impact.

If the Fed concludes that the lack of economic data limits its ability to make informed policy decisions, it could decide to pause rate changes, introducing further uncertainty and upward pressure on yields. Conversely, if the shutdown materially weakens economic activity, investors would likely seek safety in Treasuries, driving rates lower.

That said, neither outcome is desirable. Prolonged uncertainty and volatility benefit few market participants. The old adage still applies:

“You can make money on the way up, and you can make money on the way down—but it’s hard to make money when you don’t know where you’re going.”

What This Means for Commercial Real Estate Investors and Borrowers

For commercial real estate participants, the current environment underscores the importance of timing and flexibility. Borrowers may see opportunities to lock in more favorable rates in the near term if yields hold steady or decline, while investors should continue to monitor Treasury movements closely as a signal of market sentiment and potential cap rate adjustments.

While uncertainty remains, the Fed’s evolving stance toward balance sheet normalization and Treasury purchases suggests a gradually improving rate environment over the coming quarters. Staying disciplined—evaluating deals based on fundamentals rather than short-term volatility—will remain key to navigating this period successfully.

Case Study: A Master Policy, Lower Costs, Less Hassle

Quick Summary

A multifamily owner consolidated four properties (175 units) into a master insurance policy that improves coverage and drops costs to ~$500 per unit—saving tens of thousands of dollars and simplifying administration.

The Situation

Our client had four apartment properties on separate policies, which meant dealing with insurance renewals multiple times each year. Two policies (120 units) were renewing with the larger property having recently moved to the E&S market—a pricier specialty market—so its per-unit premium spiked. The client also wanted insurance to be easier to manage.

What We Did

• Combined coverage: Rolled all four properties (175 units) into a master policy.
• Met lender needs: Structured the program based on Fannie Mae requirements.
• Improved protection: Upgraded coverage rather than trimming important features.

 

The Results

• Lower cost: New premium of about $500 per unit.
• Meaningful savings: Tens of thousands of dollars versus renewing separately.
• Less hassle: One renewal date with consistent terms across the portfolio.

 

Why It Matters

For many multifamily owners, a master policy can:

• Reduce per-unit premiums
• Keep coverage aligned with lender requirements
• Cut administrative time and confusion

 

Summary & Next Steps

By consolidating into a master policy, our client lowered costs, upgraded coverage, and simplified operations.

If you’re juggling multiple policies or seeing E&S-driven price jumps, Aline Capital’s Commercial Insurance Advisory Division can discuss a master policy with you to help lower costs—without sacrificing protection.

One Cut Down, Two More to Go, But Does It Even Matter?

On September 17th the Fed delivered the first rate cut of 2025. In addition to the cut the Fed released an updated dot plot where 9 of the 19 voting members projected two additional cuts for the year, making that the mean projection and most likely scenario.

Two additional cuts have become the base expectation for the market, evidenced by a 99.0% chance of a cut in October and an 86.9% chance of a cut in December, according to CME FedWatch data.

The bond markets reacted favorably to the cut, with the 10-year Treasury briefly dipping below 4.0% to 3.99%, before returning to 4.11% the following day. While the 10-year has settled in between 4.10% and 4.18% in the weeks following the cut, dipping below 4.0% is significant as that is the first time we have seen rates below 4.0%. since October of last year.

Data has been finicky since the cut, with inflation data in the past two weeks coming in mostly higher than expected, and jobs reports being unclear, with the latest revision in the ADP jobs reports being revised below expectations and showing the largest decline in payrolls in over two years (Link). The Government also shut down effective today. Historically, shutdowns have had a limited or short-lasting impact on Treasury rates, but the impact that they do have is generally to trend rates downward given the softness and uncertainty that the shutdown creates. If there was any question as to whether the sticky inflation data was enough to overcome the weak labor market data, perhaps the Government shutdown will just add enough to clear the way for the Fed to continue to make their two additional cuts this year as expected.

We do not want to understate the impact (help) these cuts will have on the lending market, as the lowering of short-term rates will help spur activity, but as we say time and time again, the 10-year treasury has the largest impact on CRE values and permanent lending rates, and the long-end of the curve is being stubborn in the face of the cuts. It is becoming more clear that the market appears more concerned with other issues like deficit spending, the national debt, and geopolitical conflict, than it is with short-term policy and outlook. It will be very interesting to see if there is any data or moves the Fed can make to further make an impact on the benchmark bond rates, or what it will ultimately take to ease the long end of the curve.

While additional relief for CRE investors may be uncertain, we have had substantial relief in the 10-year throughout the year, falling from as high as 4.78% in January to 3.99% and settling in the 4.10% – 4.18% range. This is substantial relief and is enough to help some investors bridge the gap they’ve been needing for some time. Additionally, floating rates will continue to come down, which will help transitional and bridge plays as well as development.

So, while the Fed’s rate cuts and the subsequent market reactions provide some relief, particularly for CRE investors and those relying on floating rates, the broader impact remains uncertain. Persistent concerns over long-term issues like deficit spending, national debt, and geopolitical tensions continue to overshadow short-term monetary policy. As the year progresses, it will be critical to monitor whether the Fed’s actions can meaningfully influence the stubborn long end of the curve or if external factors will dictate the path forward for the lending and investment landscape.