Commercial real estate professionals in Europe and Canada welcomed interest rate cuts by their central banks a day apart, as surveys show expectations for the U.S. to follow suit later this year.

The European Central Bank cut rates by 25 basis points for three key interest rates on Thursday, with rates on the main refinancing operations, the marginal lending facility and the deposit facility decreased to 4.25%, 4.50% and 3.75% respectively. It argued that based on the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy, “it is now appropriate to moderate the degree of monetary policy restriction after nine months" of holding rates steady.

Canada's central bank on Wednesday made its first cut in more than four years to its overnight lending rate. The property industry is dealing with a slowdown that had been driven by a 22-year high in the Bank of Canada's policy rate before it was cut this week to 4.75%. The country's other banks are expected to lower their prime lending rates in the coming days.

The moves come as the United States Federal Reserve is expected to cut its key interest rate twice this year in the world's largest economy starting in September, according to a majority of economists polled by Reuters three weeks ago who broadly raised their inflation forecasts for a second consecutive month. Rates were boosted in the wake of the pandemic to fight inflation as economic activity picked up.

In Europe, property professionals expect the ECB rate cut to give a much-needed boost to Europe’s economies and make it easier to refinance loans against properties that were bought before a series of interest rate hikes starting in early 2022. More importantly, they hope that the cut paves the way for more reductions later in the year. However, some warn that the impact of Thursday's cut will be limited, while others worry that the ECB may have moved too early.

David Rea, JLL’s director of macro research and chief economist for the EMEA, said the rate cut “opens the door for both further cuts in the future and to a future compression in real estate yields, an attractive prospect" for investors. He added that “lower future borrowing costs and the possibility of capital value appreciation will likely begin to improve both underwriting ability and willingness, while increasing transactional liquidity."

Across Europe, the move was also welcomed. Borja Garcia-Egotxeaga Vergara, chief executive of Neinor Homes, a Spanish residential property developer, said the cut “will have positive implications for Spain’s residential market and its wider economy, which is expected to continue to outperform its European peers with GDP growth of 2.1% expected in 2024.

Real estate professionals have said they expect further interest rate reductions could follow, reducing borrowing costs for developers, owners and buyers. Bank of Canada Governor Tiff Macklem was cautious during a press conference Wednesday about tempering the reaction of property professionals and others regarding more rate cuts, but he acknowledged their likelihood. He also said he is aware that higher short-term rates, aimed at curbing inflation, have made things more difficult for buyers and renters: "We have come a long way in fighting inflation."

The decision should make it easier for real estate investors looking to buy, said Luke Simurda, director of research in Canada for commercial property brokerage Marcus & Millichap.

"The BoC indicated that it believes inflation will continue to trend down, suggesting further cuts will likely materialize over the remainder of the year. These factors will benefit not only consumers but commercial real estate investors who are awaiting positive signs regarding the cost of debt," Simurda said in a commentary.

He added that "a 25-basis point cut in the overnight rate may not cause a wave of investment activity right away given the fact that most commercial mortgages are priced off longer-term bond yields, which have largely been stabilizing around their expected values. However, it does signal to the market that borrowing costs are coming down, providing some renewed confidence for many" commercial real estate investors.

The head of one of Canada's largest residential brokerages agreed that the interest rate cut is a welcome sign for those considering getting back in the market.

“Our research indicates that half of the sidelined homebuyers in Canada plan to resume their home search plans once the bank rate begins to drop," said Phil Soper, president and CEO of Royal LePage, in an emailed statement to CoStar News. "This will no doubt spark activity and put upward pressure on home prices in the second half of the year."