Fed cuts rates, signaling caution ahead for real estate investors

The decision has less of an impact on the longer-term rates that commercial real estate investors commonly use

Sep.September 18, 2019 04:03 PM
Federal Reserve Chairman Jerome Powell (Credit: Getty Images)

Federal Reserve Chairman Jerome Powell (Credit: Getty Images)

The Federal Reserve’s decision on Wednesday to again cut its benchmark interest rate, this time by 25 basis points, sends a message to commercial real estate investors that the bank is proceeding cautiously, one industry pro said.

“The Fed clearly has some concerns that they’re responding to,” said Sam Chandan, associate dean at New York University’s Schack Institute.

The Fed cut rates to a range between 1.75 and 2.00 percent, a widely anticipated move. The U.S. economy has been rising moderately, with solid job gains and continued low unemployment, the Federal Open Market Committee said in a statement announcing its decision this afternoon.

For real estate investors, rate cuts typically mean it may get cheaper to borrow capital.

But Wednesday’s adjustment — which is for the shortest-term rates — has less of an impact on the longer-term interest rates that commercial real estate investors more commonly use, Chandan added.

The Fed’s decision is an attempt to bring down those longer-term interest rates, said Jim Costello. But the cut — smaller than what some may have liked — will unlikely affect cap rates, which have remained flat for the year, he added. “I don’t think cap rates are going to move at all from today,” he said. “Today’s notice is just a small move.”

On the residential side, lower rates may make it easier to refinance homes, but it may not translate to more home sales, said broker Jason Haber of Warburg Realty in Manhattan.

“Lower rates are good, but lower prices are better,” he said. “Most markets are still priced too high and that’s led to the inventory issues across the country.”

About an hour after the 2 p.m. decision, the S&P 500 had dipped 15 points and the Dow Jones had dropped 99 points. And out of the 28 real estate stocks tracked by The Real Deal, 22 had seen falling prices by that point.

The real estate industry has long been bracing for an economic slowdown. Investors have been grappling to price in the impact of tit-for-tat tariffs between the U.S. and China, job growth has slowed and yields on short-term bonds are now higher than long-term ones — a consistent predictor of a recession.

Business investment and exports have also slowed and inflation is still below 2 percent, a target the Fed works to hit.

In August, expectations for short- and medium-term inflation fell, with consumers particularly less optimistic about changes in the prices of homes, rent and medical care, according to data released this month by the Federal Reserve Bank of New York.

In July, the Fed slashed rates by 25 basis points, a shift in the bank’s policy of hiking up rates since 2015. During the financial crisis, the Fed had slashed interest rates to nearly zero in a bid to boost economic activity.

Wednesday’s decision, however, was not unanimous.

In its vote, two Fed Reserve board members wanted to keep the target range the same, and one wanted to drop it to between 1.50 to 1.75 percent. The Fed, which has faced mounting pressure from President Donald Trump to set zero and negative rates, would not say whether it might cut the federal funds rate again before the end of the year.

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