In a long-awaited move, the US Federal Reserve formally announced last Wednesday that it is making a half-percentage-point cut to its benchmark interest rate, a move the real-estate investors hope will be a significant step toward a recovery of property values and development activity.
Federal Reserve Chair Jerome Powell believes such a move was necessary, mainly after rates increased 11 times between early 2022 and mid-2023 to cool inflation.
But the move was also one of an unexpected series of cuts that may provide relief to property owners. The half-point cut was a welcome surprise based on expectations of a quarter-cut circulating the commercial real estate industry, said Susan Gwin Burks, a senior vice president of investment sales in Avison Young’s Dallas office.
“Our industry got knocked down pretty well following the beginning of the COVID-19 pandemic, and this helps us get back on track to see the growth that we need for our industry, which plays a big role in the economic success of our country,” Burks said.
The Future of the Half-Point Cut
The half-point cut aims to take would-be buyers off the sidelines, as well as push sellers to update their valuations to get properties better positioned and ready for the market, according to Burks.
Amid signs of a slowing economy, such as a slowdown in hiring, the move adds complexity to the Federal Reserve’s balancing act to avoid reigniting inflation and pushing the country into a recession.
According to a Federal Reserve statement, “The committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.”
“The committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the statement said. “The economic outlook is uncertain, and the committee is attentive to the risks to both sides of its dual mandate.”
During a news conference, Powell said that “we are not on any pre-set course,” adding that decisions on additional changes to the rate will come from meeting to meeting based on changing data; however, the new target rate is 4.75% to 5%.
However, the positive changes these interest rates may have will vary from market to market and more so by property type.
Within the past few years, people have been forced “to get incredibly creative in their capital stacks in order to acquire new assets,” said David Weitz, managing partner at Oak Row Equities, a real estate private equity and development company with about $1.6 billion in assets.
With the Federal Reserve’s move coming at the right time, Weitz added, “I don’t think that whatever happens today will be the last rate cut of an expected number of rate cuts to come.”
Changes in Commercial Real Estate
Yet, while investors and developers may start to see “more consistency and some more predictability in the capital markets,” as rates continue to be cut, Weitz expressed that “You’re not going to see … capital markets to just open up the floodgates and for commercial real estate to come rolling back, right? I think that’ll take time.”
However, while banks nationwide have reduced their exposure to commercial real estate, some have expanded their portfolio.
“We took a very contrarian point of view as a bank. When a lot of banks started to pull back from commercial real estate and chose not to lend or to stay on the sidelines, we pushed forward,” said Calixto Garcia-Velez, CEO of BanescoUSA, a community bank with $4.17 billion in assets that operates out of South Florida.
In Garcia-Velez’s view, the rate cut demonstrates the Fed’s confidence that “the economy is headed for a soft landing, that inflation is obviously under control, and the outlook is positive. I think that, psychologically, it’s a positive move for the country and for the economy. But I don’t think, practically, it’s going to be a material change yet.”
