Fed’s Rate Cut Opens Unique Window of Opportunity for Investors

With the Fed cutting interest rates by half a point this week and more cuts expected before the end of the year, the next 50 days could be a unique window of opportunity where the math aligns particularly well for investors, according to Marcus & Millichap’s national director of research and advisory services, John Chang.

“Investors, buyers and sellers may be working with a relatively narrow window where cap rates and interest rates align to clear the market,” said Chang. “I’m not saying the positive momentum won’t carry through to 2025 – it very well might – but some uncertainty does cloud the outlook from November 5 through January 20.”

That is the span between the election and inauguration day.

The downward pressure on interest rates is significant, with Wall Street heavily leaning toward the Fed reducing rates by 100 basis points or more by the end of this year. The next Fed rate decisions will be on Nov. 7  and December 18.

“We need to remember that additional rate reductions after September are not a foregone conclusion, regardless of how Wall Street is betting,” said Chang. “While the Federal Reserve has claimed to be blind to election results, suggesting they’ll follow their mandate regardless of who wins the presidency or the legislature, their caution levels will escalate if the election is contested. If the results are contested as strongly as they were following the 2020 election, the Fed could put rate cuts on hold until clarity emerges.”

Just before Wednesday’s rate cut, the 10-year Treasury and lending rates were down. Apartment rates on agency-backed 10-year loans were in the 5% to 5.75% range. Retail debt was running in the 5.5% to 6.25% range. Office loans, which Chang said are possible but extremely difficult to get, were running between 6.25% and 7.25%. Industrial properties were being funded in the 5.25% to 6% range. Self-storage lending was running between 6% and 6.5%, and hospitality loans were running between 5.75% and 6.5%.

“Those rates could move substantively based on how the 10-year Treasury and other metrics move in the coming weeks,” said Chang. “In addition, there’s substantial variance on rates depending on the asset quality, where it’s located, the borrower’s strength and a variety of other factors.”

The Mortgage Bankers Association forecasts lending activity will increase by about 25% in 2024 compared to 2023. Since commercial real estate sales volume for the first half of 2024 was down compared to the first half of 2023, that suggests the second half of 2024 will be much more active than in the past 18 months, noted Chang.