What The Most Recent Rate Hike Means For CRE
Inflation appears to be abating "but we're not out of the woods yet," according to one industry insider.
The Federal Reserve recently revealed a move to raise the overnight rate by 50 basis points, in a move one industry watcher says could portend good news for the commercial real estate investment market.
“It looks like inflation is abating but we’re not out of the woods yet,” Marcus & Millichap’s John Chang says. “The good news is it appears the Fed is finally shifting gears.”
Chang believes the recent movement by the Fed suggests the central bank is likely going to slow rate increases and take a wait-and-see approach, which could mean a 25 bps increase in February and a 25 bps move in March — or no move at all.
And “that would be really good for the commercial real estate market,” he says. ”It would allow lenders to stabilize rates and reduce capital market uncertainty. Buyers would be able to underwrite assets more effectively and the expectation gap between buyers and sellers could finally begin to narrow.”
While headline CPI remains high at 7.1%, it appears to be retreating from its June peak of 9%. Oil and gas prices have come down significantly, the prices of raw materials have decreased and used car prices are down 7.8% from their January high. In addition, home prices are down 4.4% from their May 2022 peak while average apartment rents have flattened. And supply chains are “becoming more stable and more reliable,” Chang says.
In other words, “the supply of goods is getting better while the demand is at least partially being curtailed by higher interest rates,” Chang says. “Together that’s taking inflation rates lower. But there are still several components of the economy that still face upward pressure,” including food costs and wages.
“If inflation continues to come down and the Fed backs off on rate increases, CRE investor activity could pick up,” Chang says. “But remember: you have to look forward three to five years and consider how commercial real estate will perform on that horizon. There may be opportunities out there today that you can capitalize on if you are looking forward over the longer-term cycle.”