federal funds rate during the past year
The reasons were hardly unexpected: inflationary pressures are of growing concern to the Fed, now rivaling the recessionary ones that have fueled the cuts thus far. For the real estate community, the decision was met with a shrug. That is because the industry, which has been gripped by a credit crunch since last August, never believed relief would be delivered by yet another cut to the rate. Indeed, even as the Fed continued to lower interest rates throughout the last several months, credit remained tight as ever.
"My view is that the real estate capital markets, especially for permanent debt, have not and do not generally respond in the immediate term to the Fed's movement," Stuart Gross, executive managing director of New York City-based Eastern Consolidated, tells GlobeSt.com. "So much debt for short-term purposes is LIBOR based."
"What we are seeing now is a very tight debt environment – and that has nothing to do with the Federal Reserve rate," Paul Ellis, president of Orlando-based CNL Commercial Real Estate, tells GlobeSt.com. "The Federal Reserve is responding to what is going on in the market – and while there is a financial mess in the debt markets, there are also now indications of inflation." Even if the Fed has loosened the rate further, he argued, capital for real estate deals would not have started to flow.
It's a non-issue for the real estate community, Carl Schwartz, chair of the commercial real estate practice group at New York City-based law firm Herrick, Feinstein, tells GlobeSt.com. One reason is that, quite obviously, the status quo remains, he says. "But the real reason is that the issue in commercial real estate finance right now is liquidity, not the cost of money. Lenders that are lending are being more selective and looking closely at the transaction, sponsor, underwriting and location -- especially the underwriting."
Some in the real estate community, in fact, laud the decision as the best course of action right now. A drop in rates might have stimulated lower borrowing rates, but fear of inflation gives senior credit officers significant concern, Scott Singer, EVP of the Singer & Bassuk Organization, also based in New York City, tells GlobeSt.com. "Alternatively, protection against inflation by increasing rates raises the specter of deeper recession, which has its own detrimental effects on the real estate finance market. So in the absence of compelling evidence over which threat poses the more imminent danger, the chosen course of inaction may have been the best possible outcome of yesterday's meeting."
"No change in the rates means no change in the landscape for commercial real estate financing," Singer continues. "That means real estate projects with strong fundamentals continue to attract debt and equity capital on reasonably aggressive terms, and marginal projects are in many cases extremely difficult to finance."
That said, few in the industry are completely sanguine about the economy and the impact it is having on local real estate projects. "There is further concern in Southwest Florida that as the national economy continues to slow down, our unemployment rates could reach an all-time high," Kevin M. Fitzgerald, president of the Southwest Florida NAIOP chapter and president of NAI Southwest Florida, tells GlobeSt.com. "This is affecting commercial projects because as the labor pool shrinks, so does the ability to complete commercial construction. Our local lenders are scrutinizing any new projects for fear that they may affect existing projects that are currently under construction and have very little tenancy." Fitzgerald concludes, however, with the observation that no matter what the economy is doing "responsible developers are going to be funded if their project makes sense and is well-planned."
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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.
