The Real Deal National

As Fed mulls rate cuts, real estate enjoys the good times but fears bad times ahead

Stocks saw an initial bump after the announcement, but some experts point to broader economic concerns
By Sylvia Varnham O’Regan and Eddie Small | June 24, 2019 07:00AM

Federal Reserve Chairman Jerome Powell (Credit: Getty Images)

Federal Reserve Chairman Jerome Powell (Credit: Getty Images)

The real estate industry loves low interest rates — but not too low.

Despite sustained pressure from President Donald Trump, the Federal Reserve left interest rates unchanged Wednesday. While it’s an initial positive for the real estate industry, the central bank’s consideration to cut rates raises concerns about an economic slowdown.

In the immediate aftermath, the stock market was bolstered by the Fed’s Wednesday announcement, said Spencer Levy, Americas head of research at CBRE, who added that it would also keep the cost of debt low.

Real estate stocks have already had a good year on the S&P 500, where a quarter of the 32 companies in the industry were trading at their highest levels in at least the past year, earlier this week. They are behind only tech stocks in terms of performance, and companies betting big on e-commerce and warehouse space like Prologis and Duke Realty are performing especially strongly.

On the flipside, however, the Fed’s announcement signaled deeper concerns. And by the end of the week, two Fed officials said they thought the central bank should have taken the opportunity to lower rates.

“The Fed is thinking about cutting rates because they are worried about the economy,” said Mark Zandi, chief economist at Moody’s Analytics. “And if the economy goes south, then that will be a problem for real estate.”

The announcement followed months of uncertainty in the market, said Ken McCarthy, principal economist at Cushman & Wakefield. The financial body was expected to raise rates into 2019, but the tone changed early in the year after the stock market’s end of end-of-year plunge, he said.

“You get this sense that the economy may be slowing a little bit, but at the same time it’s been six months of expecting that the Fed’s not going to do anything,” McCarthy said. “The question on everyone’s mind is will they lower rates, and I think the jury’s out on rates.”

Lowering interest rates would be a much stronger sign of an economic slowdown than keeping them steady, he said.

But while either move is a poor indicator for how well the health of the overall economy, news like this tends to be positive for real estate overall, as it helps keep their borrowing costs in line, according to David Schwartz of Slate Property Group.

“Lower interest rates are traditionally good for real estate, and I think keeping things steady is usually a good thing for real estate,” he said.

Dustin Stolly, vice chairman and co-head of capital markets debt and structured finance at Newmark Knight Frank, said he was seeing these effects play out.

“We’ve seen a pickup in our client base from people who have stabilized assets and want to take advantage of the low interest-rate environment,” he said. “We have a lot of clients that want to lock in the long-term fixed rate.”

McCarthy was not too concerned about a slowdown in the real estate market, either.

“A lot of it depends on the market you’re in and local conditions, of course,” he said. “Overall, we think the economy continues to support improvement and real estate.”

Moody’s Zani said the real estate industry should be cautious in the current climate, and prepared for a weakening in economic growth.

“I don’t know that they need to run for the bunkers,” he said, “but they should know where the bunkers are located.”