What the Fed's February Meeting Could Mean for CRE

The Fed’s pending decision on whether to increase the federal funds rate by 25 or 50 basis points is expected on February 1 — and it could have big implications for commercial real estate.

“If the Fed goes with 50 (basis points), it signals they think they still need to push to contain inflation,” says Marcus & Millichap’s John Chang. “That would be a disappointment for Wall Street and it would likely keep commercial real estate lending rates elevated at least until the Fed’s next meeting on March 22.”

But if the Fed goes with a 25 basis point increase, “it would signal the Fed is easing back and will likely take some time to let the dust settle,” Chang says.  ”In that case, lenders may pull back their spreads a bit, commercial real estates investors will accelerate the price discovery process, the buyer-seller expectation gap could begin to narrow and the market will begin the normalize.”

“Basically, I’m playing a guessing game with the Fed,” Chang says.

Inflation readings “are still too high,” Chang says, with the latest CPI reading hitting 7.1% in November after peaking north of 9% in June. Much of that drop came from oil and gas prices coming back down. Core CPI, which excludes oil and gas, is at 6%, while core personal consumption expenditures peaked in March at 5.4% and has since come down to 4.7% as of November.

“These are all really backward looking indicators. They’re all from November and they’re in the rearview mirror,” Chang says. Fresher metrics include the cost of shipping a container from China to the US, which “has come way down” to pre-pandemic norms. Container traffic to the ports of Los Angeles and Long Beach has also begun to slacken as retailers have dialed back imports.

“Basically retailers have stockpiled sufficient inventory in local warehouses to meet their expected demand levels and they think supply chains are safer now,” Chang says. “That will help roll back inflation.”

Manufacturing activity has also slowed, suggesting the economy is slowing and could tamp down inflation. But the labor market remains strong, with 10.5 million open jobs, twice the historical average, and the unemployment rate is still at a low 3.7%.

“Net-net, it looks like inflation will continue to recede,” Chang says. “The question will be whether the Fed also sees that trend and whether they think it’s going to come down fast enough.”