Expert: CRE Needs Rates to Come Down By 2%
Basis point cuts of 25 or 50 won’t make a difference if this is the only one.
As the world waits for Wednesday, when the Fed is to issue its belated decision on the future direction of interest rates and whether to lower them by 0.5% or 0.25%, the CRE sector is especially anxious about the outcome and hoping for the deeper cut, according to William Weisner, chair of the real estate practice at the New York City law firm Tarter Krinsky & Drogin.
“25 basis points or 50 basis points won’t make a difference if this is the only cut,” said Weisner. “If they go with 50 points, it will be a recognition that the Fed could be readying for more cuts. It would indicate that the Fed is maybe thinking of cutting gradually after this year.”
In Weisner’s view, the CRE community is more focused on the trend ahead than the specifics of the cut this time. “CRE really needs rates to come down by at least 2%,” he commented, adding that a cut of triple or quadruple the amount under discussion is called for. “It is important that this is the first of many rate cuts.”
He believes the office sector is likely to benefit the most from lower interest rates because it is the sector feeling the most pain and where owners are most likely to be distressed. Reducing their interest payments could give them more breathing room and perhaps help save the asset.
However, even if the Fed lowers rates now it may not be much help to companies that currently hold low-rate loans that come due before the end of 2025. According to the Trepp database of securitized mortgages, $602.6 billion in commercial mortgage loans, including multifamily, will come due in 2024, and many of these have been extended to 2025, with $598.0 billion estimated to mature in 2025.
“Any loan made prior to 2022 will come at a low interest rate, and if it matures now, it will be at a higher rate and, depending on the property and city, it could be very difficult to refinance,” Weisner commented.
Even after the Fed’s ruling, Weisner does not anticipate any pickup in CRE lending, purchases or sales until next year. Instead, deal value and volume are expected to remain steady or flat as the industry adjusts. Delayed gratification may lie in store.