Federal Reserve interest rate policy ushers in strategic development

Writer: Mirella Franzese

January 2026 — Heading into 2026, Federal Reserve interest rate policy is setting up a pivotal year for U.S. development as the industry adjusts to a higher-cost capital environment and begins to emerge from a prolonged holding pattern.

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After cutting down rates by 25 basis points in December, Fed officials are likely to hold funds at the target range of 3.50%-3.75% throughout the remainder of this quarter, according to The Hill. This stance is likely to shape construction financing, project feasibility, and development timing across the U.S. economy.

After absorbing the sharp rate hikes of the past several years, many developers across the country are now operating under the assumption that elevated borrowing costs are no longer a temporary disruption.

“The initial shock of the interest rate spike a couple of years ago simply took a considerable amount of time for the industry to process and adapt to,” John Banas, senior vice president and managing director of debt and equity at Northmarq, told Invest:. “But there is a growing understanding that this may be the new normal.”

Banas noted that the industry is starting to recalibrate its expectations in light of market realities. “It is important to note that a 5% interest rate, historically speaking, is not a bad rate,” he said. “I believe the market is beginning to understand that these conditions may persist for the next few years, and we are starting to observe a lot more transactional business as a result.”

While monetary easing has begun, further reductions are not guaranteed. An uncertain economic outlook could actually mean hikes in interest rates, even if, realistically, additional cuts are likely this year, according to most economists.

For developers, the result is not a freeze in activity but a shift in strategy. “There are always going to be hurdles and speed bumps, including the Fed rate and market conditions,” said Austin Fox, principal of Austin Fox Architecture in Greater Fort Lauderdale, in an interview with Invest:.

“What we’re seeing on our end isn’t a halt. No one is really stopping. It’s more transitioning between different markets and different sectors, and figuring out how to make the numbers work,” he added. 

While lower interest rates have strengthened confidence around long-planned projects, industry experts believe that modest cuts alone will not be enough to stimulate a new wave of development. 

“The recent rate cuts by the Fed are good news, but I don’t see this cut moving the needle very much,” said Granger Hassmann, regional president of Gulf States at Adolfson & Peterson, a Minneapolis-based general contractor, as cited by Construction Dive. 

This is because long-term interest rates — which play a larger role in financing multi-year projects — remain elevated, limiting the pass-through effect of Fed policy on construction loans, especially in the CRE space.

Capital markets remain constrained not only by these tighter financial conditions but also by the growing disconnect between buyers and sellers as a result. 

“Sellers are generally not overly motivated to sell at higher cap rates, and buyers feel they need stronger returns to offset higher interest rates and slower rent growth projections,” David Duckworth, principal of capital markets at Avison Young, told Invest:. “Until those expectations realign, volume will remain modest. As rates come down, that gap should begin to close.”

On the other hand, transaction activity is already responding to the Fed’s deduction at the margins. According to CRE Daily, valuations are stabilizing, credit markets reopening, and investor sentiment turning more optimistic — signaling a broad market rebound.  

“When investors gain confidence, deals happen—and the market moves forward,” added  Kevin Welsh, executive managing director at Newmark, in an interview with Invest:. “I’m optimistic that deal activity will continue building in the coming quarters in a market that’s regaining its footing.” 

Even if the Federal Reserve keeps rates steady, the momentum is shifting. “We are moving in a favorable direction regarding interest rates,” added Banas.

Banas noted that construction loans, which are typically floating-rate and closely tied to Fed policy, could offer incremental relief as rates drop. 

“As the Fed rate continues to decline, we will see more developers and investors taking advantage of that lower cost of capital (environment),” he said.

Beyond financing, lower policy rates are also reopening conversations around projects that were shelved during peak tightening, with the commercial sector easing off from the holding pattern of 2025, according to Wiss. 

The near-term outlook, therefore, points to a development environment shaped less by rapid expansion and more by strategic adaptation in light of persistent challenges, like cost volatility, labor constraints, and policy swings. 

Whether the Fed cuts again or holds steady, developers will still have to adapt to a higher-for-longer rate landscape that rewards precision, strong fundamentals, and clear demand drivers. In that context, monetary policy may set the backdrop, but adaptability will determine which projects ultimately move from concept to completion.

Want more? Read the Invest: reports.