Fed Rate Cut Sparks New Questions for CRE

After cutting interest rates by 50 basis points, the Fed has answered a major question, but more concerns about the economy and the impact on commercial real estate have arisen.

Many investors are asking why the 10-year Treasury went up after the Fed cut the overnight rate, said Marcus & Millichap national director of research and advisory services John Chang.

“Although the many different US Treasury rates tend to move in the same direction, like an unruly herd, they don’t move in lockstep,” said Chang. “The timing and magnitude of interest rate movements of various maturity terms can vary, and they can even go in opposite directions over the short term.”

In addition, the rate cut was already baked into bond pricing and some investors viewed the large cut as a sign the Fed is concerned about recession risk, he said, noting often-cited statistics that recessions tend to follow rate cuts by about 18 months. He encouraged investors to take that spread with a grain of salt, however, as it took 69 months for a recession to form after the 1995 rate cuts, which was arguably a soft landing, he said.

Chang highlighted the unique situation the country finds itself in compared with past rate-reduction periods. The economy continues to add jobs, retail sales are positive and cash savings are near-record high.

Change asked “So the rate cutting climate we’re in right now is arguably different this time, but where does that leave us?”

“Wall Street is anticipating the federal funds rate will move to the mid-3% rate by summer next year and reach 3% by the end of 2025, so Wall Street’s betting the Fed will continue to cut rates.”

That would be good news for CRE investors, barring a recession. The expectation of further rate cuts over the next several months is already spurring aggressive bidding on some multifamily, industrial and retail assets. Northeastern and West Coast gateway markets that were less impacted by pricing pressure and development in the last cycle, are seeing the most activity, said Chang. Institutional investors are also coming off the sidelines and re-engaging as the investment climate starts to shift.

“Falling interest rates could spawn downward pressure on cap rates, but to get there, we need to see an aggressive buyer pool with ready access to relatively low-cost debt capital, and we’re not there yet,” said Chang. “Whether we get there, that’s still up in the air. From my perspective, the commercial real estate market has shifted gears, and the outlook for most property types is generally positive.”