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‘A Sea Change In Optimism’: Real Estate Reacts To First Interest Rate Cut In 4 Years

National Capital Markets
National Capital Markets
September 18, 2024 Ryan Wangman, Chicago

From sheer jubilation to fears that a 50-basis-point cut in interest rates could portend a weakening economy, real estate had a lot to say about the Federal Reserve's latest move.

Press releases and tweets flew fast and furious in the wake of the Federal Open Market Committee’s massively anticipated decision Wednesday.

Ahead of the policy action, capital markets had largely expected a 25-bps cut, a measure that might have had more impact on dealmakers' mindsets than on their bottom lines. A more sizable cut from the Fed could throw more weight behind growing CRE hopes that its worst days are behind it. 

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Unsplash/Miles Burke

Richard Barkham, global chief economist at CBRE, said at a virtual media briefing that real estate is seeing the benefits of a “soft landing” playing out in the economy, with very little impact so far from a slowing labor market.

A 50-bps cut will “be welcomed” by the real estate community, he said.

“In the last couple of months — and it will be consolidated and built on by this cut in interest rates — there's been a sea change in optimism in real estate capital markets, which have seen very low levels of transactions and have seen a fall in real estate values over the last 36 months,” Barkham said.

Bisnow rounded up industry reactions to the news from over a dozen people across various sectors of CRE:

 

The 50 basis point rate cut signals a more aggressive move from the Fed than many anticipated. While lower rates may help some needing to refinance maturing commercial real estate loans, clarity and consensus in terms of valuations may have taken a step back.

— Moody’s Head of CRE Economics Tom LaSalvia

 

This rate cut is welcome news for many sectors of the economy, and particularly for the real estate industry. If this initial cut is followed by additional cuts, and if we avoid a recession or other economic disruption, we will very likely see activity in 2025 that brings more supply to both the single-family and multifamily housing market. This will, in turn, help keep down single-family home prices and multifamily rents, helping the Fed get to its 2% inflation target. Shelter costs are a full one-third of the measure of inflation and high interest rates have helped to keep housing costs high in the past several years.

— Pembrook Capital Management founder and CEO Stuart Boesky

 

This rate reduction and the signal that additional cuts may follow send a powerful positive message to real estate investors and developers. While there are a host of different forces affecting residential investment, from burdensome regulations to high insurance costs, the demand for new multifamily product continues to grow, and a more accommodative rate environment will significantly increase investment activity in 2025.

— S3 Capital co-founder and principal Robert Schwartz

 

 

While interest rates are not the only force affecting investment in the commercial real estate industry, this reduction is a positive move that will begin to reduce uncertainty and position owners and investors to meet long-term demand trends. Lower borrowing costs combined with a steady economic environment in the near- and mid-term will likely significantly increase investment activity, enabling industrial real estate developers to advance new facilities that have not been viable in the past two years based on the cost of financing. At the same time, lower rates could enable property owners to reinvest in existing facilities through additions, expansions or upgrades.

— Greek Real Estate Partners Managing Partner David Greek

 

Everyone expected today’s rate cut and the expectation is there will be more rate cuts, but how many and how much and over what time frame is still being debated. There is significant pent up demand to transact – jump in now before prices rise or wait for rates to drop further and risk upward price corrections? Some borderline distressed properties with maturing debt may get a life line if rates come sufficiently down and soon enough.

— FTI Consulting Senior Managing Director and Co-Lead of Real Estate Solutions Jahn Brodwin

 

The Fed's first rate cut in four years is a critical step for the commercial real estate market, which has been paralyzed for too long. While it’s not a cure-all, it’s a powerful psychological signal that could break the market's stagnation. Investors have been hesitant, holding back due to uncertainty, but today’s decision might finally shift that mindset. The hope is that we’re turning a corner, where deals can start moving again, helping to restart the real estate recovery and stabilize our broader economy. There’s an estimated $324 billion in dry powder sitting on the sidelines, waiting to be deployed in real estate. This rate cut could be the push investors need to start putting that capital to work, unlocking significant potential for growth and recovery.

— Rastegar Property Co. founder and CEO Ari Rastegar

 

 

The Fed's half-point rate cut decision is the beginning of six to eight rounds of further rate cuts well into 2025. The very next cut will occur after the presidential election. The justification is cooling inflation in recent months and lighter job gains. Mortgage rates have already anticipated the Fed’s likely path. That is why the 30-year rate has fallen by 150 basis points from early in the year to today. Any further decline in mortgage rates will be minimal.

— National Association of Realtors Chief Economist Lawrence Yun

 

The FOMC projections highlighted that inflation is returning to target more quickly than the Committee had expected in June and that the unemployment rate has moved higher and is likely to stay higher than expected. While not likely to be in a recession, the U.S. economy is likely in for a period of slower economic growth. It is also important to note that the FOMC’s estimates of the neutral fed funds rates keeps moving up, and that the committee members see a range of outcomes, from 2.5-3.5% as consistent with neutral in the long run.

— Mortgage Bankers Association Senior Vice President and Chief Economist Mike Fratantoni

 

The rate cut is an important factor in stimulating new multifamily development and investment activity, but if interest rates go down too much, it could stimulate a rise in construction costs that offsets any benefit from the drop in interest rates. The Fed has to use caution with its individual rate cuts. Banks today are asking for 7-8% and aren’t looking to give a developer a break on anything because they don’t know what the overall market is going to look like. Moving forward, banks will be a bit softer on rates but will see the writing on the wall very quickly. I only anticipate a few small quarter-point-type drops over the rest of 2024 as opposed to more dramatic cuts. Costs of certain key materials are not going down in lockstep with interest rates.

— The Astor Cos. CEO Henry Torres

 

 

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. This means any asset with a maturity issue is facing a value hole that must be addressed. No one is looking at this aspect and these rate adjustments will only provide some recapture of lost value, but it won’t fix the real issue.

— The Lynd Group CEO A. David Lynd

 

Despite recent CPI data that pointed to cooling inflation, the Fed had been eyeing a 50 bps rate cut after the weak August jobs report and large downward revision last month, which we believe played a role in today’s move. In terms of the impact on the real estate market: a 25-50 bps rate decrease could encourage investors to move back toward real estate acquisitions. Many investors have been on the sidelines for the last year or so waiting until a slightly better buying climate arose. We’ve brought eight properties to market, with expected sales prices totaling $225 million, in part because we feel a 25-50 bps decrease might help entice investors to test the waters. Also, an increase in transactions would increase liquidity and help buoy the commercial real estate market.

— Hamilton Point Investments Co-Founder and Managing Principal Matt Sharp

 

The initial impacts of a rate drop will be felt primarily among consumers, rather than across the capital markets. Unless a borrower is facing a time crunch, the natural instinct is to wait to take on debt until there is clarity about where rates will ultimately stabilize. From a real estate lending standpoint, an asset’s fundamentals are more important than rates when it comes to underwriting an asset and placing debt. This means putting added weight on factors like sponsor quality, an asset’s location and the underlying real estate, and a borrower’s equity position.

— BH3 Management Co-CEO Gregory Freedman

 

 

This cut will help alleviate the biting restriction of today's high interest rates, signaling the beginning of a turnaround in asset pricing while also providing a cyclical boost to real estate investment and development. Both residential and commercial sectors will feel the positive effects of these adjustments, specifically with multifamily investments experiencing improved financing options. However, a more meaningful impact on construction starts will require further rate cuts, especially given supply challenges.

— Cymbal DLT Chairman Asi Cymbal

 

Over the past two years, the volume of M&A activity was negatively impacted by increased interest rates and the gap in perceived valuations between buyers and sellers. This slowdown was readily apparent in the large cap M&A market. However, in middle market and lower-middle market M&A, these two factors had less of an impact, because the gap in perceived valuations between buyers and sellers was being bridged by deferred purchase price mechanisms such as earn-outs and seller-financing. With anticipated lower interest rates already being priced into the capital markets, an actual decrease in rates will likely spur a further bounce-back in the volume of M&A activity in the large cap market, as well as the middle market and lower-middle market. 

— Bilzin Sumberg Corporate & Securities Practice Group Leader David Seifer

 

As many banks scaled back their commercial real estate lending, Banesco USA invested in growing our CRE lending division. Following the first set of interest rate cuts, I am skeptical that we'll see a rush of activity or any major impact on deal flow. Psychologically, an initial rate cut sends a positive signal that the economy is likely headed for a soft landing. Practically speaking, I believe we will see a material change as subsequent rate cuts come to fruition, allowing previously shelved real estate projects to become financially viable again.

— Banesco USA President & CEO Calixto "Cali" Garcia-Velez

Matt Wasielewski contributed to this story.

Contact Ryan Wangman at ryan.wangman@bisnow.com
Related Topics: Federal Reserve, Interest Rates, CBRE, Richard Barkham, Federal open market committee