Commercial real estate owners woke up Wednesday feeling like it was Christmas morning. When they opened their present from Federal Reserve Chair Jerome Powell, some saw a Hess truck, but others found coal.
The Fed announced its long-awaited interest rate cut that afternoon, its first since the pandemic, voting to lower rates by a half point. The federal funds rate will now lie between 4.75 percent and 5 percent.
It has been more than two years since the Federal Reserve began raising interest rates in 2022, setting off a wave of constriction and distress across commercial and resi markets. While Texas has fared better than many other states, its metro markets have still weathered frozen capital markets, slowed construction and decreased rents and home values.
The Fed’s decision to cut rates by a half point, rather than a quarter point as some expected, is a more aggressive move, but still may not be enough for deals to pencil out. It is still an election year, and other costs remain elevated, so rate cuts will only go so far, developers and agents say. Still, players across Texas’ markets see the decision as a positive sign, if not a silver bullet.
“The aggressive move exceeded most expectations,” said Eric Bramlett, the founder of Bramlett Residential, an Austin-based residential brokerage. However, he cautioned that the presidential election may impact tax incentives, mortgage lending regulations and housing affordability. That leaves too many question marks for some buyers, even if mortgage rates come down.
“Given the political and economic uncertainties, it may take time for these rate cuts to translate into increased buyer activity,” Bramlett said.
For other resi players, the cut is a start, but more are needed to make a dent.
“If we get down below six and those [mortgage] rates start going at five and a half, five and three quarters, we could see that inventory gets soaked up very, very quickly,” said Jim Fite, president of Century 21 Judge Fite Company.
As for multifamily, rate cuts are expected to help investors, particularly those struggling to keep up with floating-rate debt payments. Still, plenty of other costs are keeping deals from crossing the finish line, according to A. David Lynd, CEO of the Lynd Group.
“Today’s rate cut is a positive step for multifamily, but its impact will be limited. The real threat to our industry’s value problem lies in inflation-driven expenses, some of which continue to rise,” Lynd said.
The value of some apartment buildings has decreased since the market’s early-2022 heights, when value-add players competed over increasingly old and decrepit properties.
“These rate adjustments will only provide some recapture of lost value, but it won’t fix the real issue,” Lynd said.
Ben Jacobson, a partner at Palm Beach-based lender Forman Capital, which has done deals in Texas, echoed the concern over rising costs in insurance, construction and maintenance.
“I believe the rate cut will not have a significant positive effect on commercial real estate,” Jacobson said. “We still have a way to go before we see things tilt back towards equilibrium.”
To others, the relative strength of most Texas markets has some saying development may ramp up for product types in high demand.
“If you’re building the product that people need — multifamily, industrial, perhaps data centers — it’s full speed ahead,” said Weaver’s Howard Altshuler.
For Madera Residential’s Jay Parsons, the rate cut feels more like the end of a long Texas summer: the highs are still in the 90s, but things are headed in the right direction.
Uncertainty paralyzed the market, Parsons said. The cut will jostle the market out of that frozen state by signaling that more positive movement is on the horizon — and that’s the most important takeaway.
“Direction and momentum in commercial real estate are arguably more important than the number itself,” he said. As far as the election goes, he believes “it’s more of a talking point” than an event with major market effects.
Historically, interest rate reductions have boosted property valuations and compressed cap rates, Partners’ Steve Triolet said. Still, he cautioned not to expect “a dramatic spike” in pricing, especially for multifamily. That won’t happen until rents recover.
Lower rates could also provide additional options for distressed assets, Parsons said.
Since interest rates spiked, refinancing options were minimal, pressuring lenders and pushing more distressed assets to foreclosure. Easier access to capital could shake out more exit options for assets in “lowercase d” distress.
“As the market’s finding its footing,” he said, “we could see more of those deals start to transact.”
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