Fed's Decision to Hold Rates Might Be a Turning Point

The key for CRE will be the Nov. 1 Fed decision.

The Fed’s decision to hold rates flat last week is a very positive sign, according to a new video by Marcus & Millichap, “but we’re not in the clear yet,” said John Chang, its Executive Vice President of Research and Client Services.

“The November fed meeting will be key,” he said. “If they hold rates flat at that meeting, as Wall Street currently expects, then the commercial real estate industry will have even more clarity.” Last week, as virtually everyone expected, the Federal Reserve held the overnight rate flat in the 5.25 to 5.5% range.

Although Chairman Powell remains non-committal, it’s widely believed that the Federal Reserve will keep rates stable through the remainder of this year and into 2024, Chang said.

“Of course, that’s not guaranteed, and there are some signals that the Fed will make one more rate increase this year,” he said.

In June, Powell used the term “skip” when talking about not raising rates, essentially telegraphing the rate increase that came in July, Chang said.

“This time, Chairman Powell didn’t use the term skip,” he said. “Instead, he reiterated the Fed’s reliance on incoming data while weaving in language suggesting they are open to keeping rates flat. That little language tweak is a promising sign.”

CRE needs two consecutive meetings where the Fed doesn’t raise rates to call it a trend. November’s Fed meeting could bring more clarity.

Wall Street is already baking in a 74% likelihood that the Federal Reserve will keep rates flat on Nov. 1, and a 55% probability rates will remain unchanged when the Fed makes its final announcement of the year on Dec. 13.

“If the Fed does continue to hold rates flat that would be a significant turning point for the commercial real estate market,” Chang said. “Lenders may finally begin to ease their lending practices, which could manifest in a small reduction of interest rates.

“As lenders begin to reduce their lending spreads, the lenders who have moved to the sidelines may begin to reengage the market.

“That would expand the pool of potential debt capital available to investors and support transaction activity.”

Such an event would be a critical step in the process of closing the expectation gap between buyers and sellers, Chang said.

“We’re already seeing signals that the investment market is beginning to revive,” he said. “It hasn’t shown up in the closing activity yet, but we are seeing it in the preliminary activity stages like owner requests for opinions of value and buyers signing confidentiality agreements.

“Although the expectation gap between buyers and sellers is still wide, we are seeing some movement toward the middle by both buyers and sellers.

“Property owners are beginning to come to terms with the reduced property values of the current market while prospective buyers have largely come to accept that a massive wave of distressed properties is unlikely.”

Chang said the big wave of distress caused by rate increases that many investors expected would likely be more of a trickle.

“The Fed’s decision to hold rates flat last week might be the turning point we’ve been waiting for,” he said. “And investors who’ve been on the sidelines for the last year or 18 months have begun to test the waters.

“That suggests more inventory may be coming to market but it also means competition for properties will likely begin to rise.”

He said it’s important to note that structurally most commercial property types are in a healthy position with a strengthening outlook.

“New supply risks are shrinking for most property types,” he said. “The cost of construction financing, labor, and materials remain elevated and that will curtail new supply risks for most property types over the next couple of years.”

At the same time, he said, vacancy levels for most property types with the notable exception of urban office are relatively stable in most markets.

“This combination of stabilizing forces should bolster investor ability to make decisions, and that should begin to revive the commercial real estate transaction market,” he said.

Article courtesy of Richard Berger of GlobeSt.

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