Here's How CRE Will Benefit If the Fed Really Has Stopped Raising Rates

The Federal Reserve raised the overnight rate by 25 basis points last week, prompting the question of whether that was the last rate increase of this cycle.

Chair Jay Powell, though, sounded a bit “cagey,” according to John Chang, senior vice president, research and investor services, Marcus & Millichap.

“In the past, the Fed Chair has been pretty good about telegraphing their next move, but this time, he kept saying the decision will be data dependent,” Chang said.

Powell didn’t come out and say there won’t be any more rate increases, but unlike the meeting in June, he also didn’t telegraph another rate increase.

“That’s a win in my book,” Chang said.

Currently, Wall Street is assessing an 80% likelihood that the overnight rate will not change when the Fed meets in September.

In addition, they’re saying there’s a 70% likelihood the Fed will keep rates flat in November, and a 61% chance the Fed will keep them flat again at their December meeting.

So generally speaking, the odds-on bet, for the remainder of this year, is that the Fed will keep rates flat and that would be a very welcome change for commercial real estate investors.

“So, as long as we don’t have a significant unanticipated surge of inflation, the Fed should hold off on additional rate increases,” Chang estimates.

If the Federal Reserve holds rates flat through the remainder of this year, as Wall Street expects, the real estate market will benefit in three ways.

First, it should help stabilize the lending climate. Borrowing rates may come down a little bit. Lenders may stop tightening their lending criteria and more banks may reenter the lending market.

Second, it will help buyers underwrite assets more accurately because financing and interest rates, should become less volatile. That in turn should help reduce the buyer-seller expectation gap.

The third way is that it will reduce uncertainty.

“Basically, a lot of investors hit pause on their activity, because there have been too many variables in play,” Chang said.

“Stabilized interest rates, and the reduction of uncertainty that goes with it, should bring more investors back into the market, which will in turn facilitate the price discovery process thereby further reducing uncertainty.”

Chang offered reasons why the Federal Reserve probably won’t have to raise rates again.

First, significant declines in several inflation measurements such as the Consumer Price Index, which has fallen steadily since it peaked at 9.1% in June last year. The Producer Price Index has also dropped dramatically down from 11.7% in March last year, to its current level of 0.1%.

There’s also been downward pressure on Core CPI and Core PCE, the Fed’s “favorite” inflation metric, Chang said.

The second is the resumption of student loan payments this October. It’s estimated that this will reroute about $70 billion per year into debt repayment that might otherwise go into consumption.

“Siphoning off that much spending should be disinflationary,” Chang said.

The resumption of student loan payments should restrain consumption, especially in conjunction with falling levels of personal savings.

“Excess savings is being burned off and the total amount of cash in savings accounts and money market mutual funds, is moving back into alignment with its pre-pandemic trend,” Chang said. “That should help moderate spending in the second half of this year, reducing demand-side inflationary pressure.”

Another is that economic momentum is tapering.

“Job creation, while still positive has slowed significantly,” he said.

In the second quarter of this year, an average of about 244,000 jobs were created per month, compared to an average of 330,000 per month, in the second quarter of last year.

Finally, the Fed doesn’t really know whether the rate increases are already playing out in the economy, or if the true impact is yet to come,” Chang said.

“Because of that, unless they have a specific reason to raise rates, they’re more likely to take a wait-and-see approach, at least over the short term.”