September 29th, 2025
🚦 Big Picture Takeaways
Fed: Rate cut signals responsiveness, not a pivot. Refinancing to move first.
Consumers: Spending resilient, but savings flat; inflation still sticky.
Manufacturing: High-tech drives gains; traditional sectors and jobs lag.
Housing: Crisis deepens; local policy reform critical despite federal incentives.
📢 Outlook: The economy enters Q4 in a state of cautious balance. Consumers and high-tech sectors are providing resilience, but housing, inflation, and employment challenges continue to weigh. Expect gradual easing, uneven transmission, and heightened importance of local policy decisions in shaping outcomes.
The Federal Reserve reduced its policy rate by 25 basis points in September. This cut is more about flexibility than stimulus. Inflation is still above target, but labor market weakness is becoming harder to ignore.
🔎 The Fed’s Balancing Act
The decision underscores a difficult tradeoff that Chair Powell often reiterates:
Inflation: Progress remains incomplete, keeping the Fed cautious.
Employment: Data is softening, raising risks of underreacting.
Key questions:
Will lower rates reignite inflation? The demand-inflation link is weaker than in the past, leaving outcomes uncertain.
How will markets interpret the cut? If viewed as the Fed easing up on inflation, expectations could drift upward, tightening long-term yields.
🛍️ Consumer Spending Climbs in August
Spending Outpaces Income Growth
Consumer spending rose 0.6% ($129.2B) in August, led by transportation and food services. Personal income grew 0.4%, suggesting households are still largely breaking even.
Inflation check: Fed’s preferred gauge rose at a 2.7% annual rate, below CPI’s 2.9%, but still above the 2% target.
Investor takeaway: Consumer demand is healthy, but gradual inflation cooling limits the Fed’s room to ease quickly.
📊 CRE Market Implications
Borrowing costs track long-term Treasuries and credit spreads more than Fed funds directly.
If markets view the cut as inflationary, yields could stay elevated, blunting the benefit.
Refinancing is likely to pick up first, especially for borrowers nearing maturities after exhausting extensions.
Office and valuation-challenged assets may need deeper easing before meaningful deal flow resumes.
Origination outlook:
YTD originations at $64B, driven by fundamentals, not policy.
Further cuts could improve underwriting, but historically, 12–24 months are needed for rate changes to flow through to deal activity.
⚙️ U.S. Manufacturing: Mixed Signals Entering Q4 Production Gains vs. Job Losses
Output: +0.2% in August; +1.1% YoY.
Employment: Flat or negative in 9 of the past 12 months; down 0.6% YoY (78,000 jobs lost).
The gap reflects the growing dominance of high-tech sectors that are less labor-intensive.
High-Tech Leads, Traditional Manufacturing Lags
Computers & electronics: +6.7% YoY, fueled by CHIPS Act investment.
Non-tech output: +0.6% YoY, still below 2022 and pre-pandemic levels. Since 2017, non-tech down ~1%, while high-tech up 28%.
Other Sector Highlights
Autos & transportation: +2.9% YoY, with unit sales up 5.5% and dealer spending up 6%.
Chemicals & pharma: +3% YoY; pharma has sustained >6% growth since July 2024.
Metals & machinery: Modest growth.
Non-durables: Textiles, apparel, appliances, and furniture continued to decline.
Sentiment & Policy Backdrop
ISM (Aug): Sector contraction, 7th straight month of employment weakness; new orders ticked up.
FOMC outlook: Wide divergence — end-2025 rate expectations range from 2.9% to 4.6%. Median path: 50 bp more cuts in 2025, then 25 bp annually in 2026–27.
🏘️ Affordable Housing Crisis Deepens Costs & Regulation Keep Supply Constrained
Rising construction, labor, insurance, and property taxes are worsening the housing shortage. Developers say local regulations—high fees, slow permitting, and restrictive rules—are the biggest barriers.
Few expect improvement before 2026.
Nonprofit developers face shrinking funding and tighter capital access.
LISC response: Plans to invest $5.2B over three years across 36 markets to expand affordable housing.
Federal & Local Levers
Federal support: The “Big Beautiful Bill” increased LIHTC allocations by 12%. The Fed’s rate cut may help debt markets, but inflation remains the swing factor.
Local action: Cutting fees, streamlining approvals, and fostering innovation remain the most powerful tools.
Investor takeaway: Policy support provides tailwinds, but structural barriers and inflation pressures mean local reform is essential for long-term solutions.
*Data from this weeks newsletter sourced from Costar, Federal Reserve data, Trepp, Green Street, Bloomberg, Tradingview
