(Read more on the debt and equity markets.)
WASHINGTON, DC-The Federal Reserve bank has cut by one-quarter the federal funds rate to 4.3%. It is the third time in the last few months that the monetary authority has taken a whack to this key interest rate in the apparent hopes of staving off recession. In September, it lowered its target for the federal funds rate 50 basis points to 4.8%. Then in November it lowered the federal funds rate target by another 25 basis points to 4.5%--a move that was accompanied by a warning that this was likely all the market could expect for the foreseeable future as it believed that the upside risks to inflation roughly balanced the downside risks to growth.
Six weeks later, the Fed not only changed its mind about inflation outweighing the risk of recession, but has also thrown out hints that more cuts may be coming if the economy worsens. Many in the commercial real estate industry believe the cut will have only a limited impact on the lending environment, which is currently in freeze mode due to several complex factors.
"The Fed's discount rate will help lender's cash position and could help developers with costs associated with construction lending as well as tenant improvement allowances," Nat Davis, principal with Houston-based WDJ Realty Group, tells GlobeSt.com. "However, considering most permanent financing is based upon the 10-Year Treasury--which has gone down dramatically in recent months, but the spread has tripled from 100 bps in June to 275-350 bps today--the federal interest rate won't affect commercial developers much at all." Most financing that buyers of commercial property use is based upon the 10-Year Treasury, not the federal interest rate, he notes.
Most, but not all. Adam Petriella, senior director of Marcus & Millichap Capital Corp. in Los Angeles, tells GlobeSt.com that what a reduction in the bank's cost of money--for example, the federal funds rate--will directly impact the cost of financing for borrowers. "I am in the midst of originating several loans with portfolio lenders whose 'cost of money' plus a spread results in interest rates that seem high compared to where the 10-year or five-year T Bills are currently.
"A reduction in the rate will induce discretionary financing. Those who need to refinance because of a balloon coming due, well, they have no choice but to live with the current market pricing. But again, with a reduction in the cost of funds, we will see increased borrower activity."
Stephen Lampe, EVP of RE/MAX Commercial and Investment Realty, also notes that most financial institutions had already priced in a quarter point cut into current interest rates on loans. "Even with the 10-Year Treasury hovering around 4%-plus--lender's have already widened the spreads that they add to the various indexes," he tells GlobeSt.com. "In the current market, investors are yield driven and lower rates should stimulate more acquisition activity across the board if lenders pass the reduction on to borrowers."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
