{"id":1004667253,"date":"2023-06-12T04:02:45","date_gmt":"2023-06-12T12:02:45","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004667253"},"modified":"2023-06-13T07:21:58","modified_gmt":"2023-06-13T15:21:58","slug":"cre-expects-rate-hike-pause-heres-what-it-means","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/cre-expects-rate-hike-pause-heres-what-it-means\/","title":{"rendered":"CRE Expects a Rate Hike Pause. Here’s What It Means.\u00a0"},"content":{"rendered":"
\"Federal<\/a>

iStock-1401649530 Image by tanarch<\/em><\/p><\/div>\n

Ahead of the Federal Reserve Open Markets Committee<\/strong>\u2019s next meeting on June 14, many across commercial real estate anticipate a likely, if short-lived pause on interest rate increases. Following the committee\u2019s meeting in May<\/a>, Fed Chairman Jerome Powell hinted at a pause on rate increases, if data from sources such as the Consumer Price Index, the Employment Cost Index and metrics such as inflation and wage growth allow for one.<\/p>\n

With inflation, the root of all recent interest rate hikes, moderating considerably to 4.9 percent since its high of 9.1 percent in July of 2022, an average 40-basis-point increase of the CPI and labor costs rising 1.2 percent over the last quarter, many in the industry anticipate a certain, not implied pause<\/a>. At the same time, many anticipate another increase in the funds rate in July, which could alter these fundamentals. Either way, it will not be a panacea to the economic conditions that investors, lenders and developers in commercial real estate face.<\/p>\n

Timely, if fleeting<\/h2>\n

Experts near-universally expect a pause, as the encouraging data, coupled with the existing rate of 5 to 5.25 percent factors into the decision-making of lenders, borrowers and employers. \u201cIt takes time for these increases to work their way through the system,\u201d explained Bryan Kenny, president & principal of Bandon Capital Advisors. <\/strong>\u201cA pause makes sense given the encouraging data,\u201d he told Commercial Property Executive<\/em>.<\/p>\n

Not only is a pause at the June meeting important for the health of these economic fundamentals, but it would give the Fed time to assess the longer-term impact of previous rate hikes. For Noel Liston, managing broker at Core Industrial Realty<\/strong>, this necessity in itself warrants a pause. \u201cThe Federal Reserve is in a precarious position in as much as they need the benefit of time and experience to fully assess the impact of the numerous increases to the federal funds rate over the past year,\u201d he said.<\/p>\n

If the foreseen pause on increasing the interest rate does occur, however, many in the industry anticipate another hike in July. This would, in part, be due to inflation not moderating to the Fed\u2019s stated goal of 2 percent, independent of all the other data. Here, raising rates is the only thing they can do.<\/p>\n

According to Scott Robinson a clinical associate professor & director of the REIT Center at the NYU Schack Institute of Real Estate<\/strong>, \u201cthe data indicates improvement to the inflation situation but most definitely not \u201c\u2018mission accomplished,\u2019\u201d he noted. Upon viewing the projected data, the Fed is likely to raise rates once again. \u201cThe sentiment is for a near-term pause but with another hike likely after that,\u201d Robinson said.<\/p>\n

Tempered expectations<\/h2>\n

Despite the positive industry sentiments that a pause would bring about, it would only be one ingredient necessary to giving commercial lenders and investors the confidence and predictability necessary to close on deals.<\/p>\n

Conversely, a month of paused rates followed by a resumption of increases would not give lenders the stability that they are looking for. Rebecca Rockey, deputy chief economist & global head of forecasting at Cushman & Wakefield<\/strong>, emphasizes the importance of \u201cclarity;\u201d consistent, long-term trends for macroeconomic data combined with the Fed pausing on increasing its funds rate as the key catalyst for warming sentiments. \u201cIt is month by month at this point,\u201d she said.<\/p>\n

\n

READ ALSO: <\/strong>CRE Brokers Power Through Decline in Deals<\/span><\/a><\/p>\n

\n

Though the improvements to inflation are significant, they are not enough, and will not be for several months at the earliest. \u201cWhat we probably need to see are multiple months of inflation coming down, consistent with labor force growth and thus no additional tightening,\u201d Rockey explained. This, combined with the paused rates, would lighten sentiments on part of the lenders. \u201cOnce we have a pause and incoming data that looks like things are heading in the right direction in a sustainable manner, then I think we’ll see things accelerate in the CRE space,\u201d she said.<\/p>\n

The biggest enemies toward deal-making are volatility and uncertainty within the macroeconomic outlook itself, which cannot disappear overnight. This waiting game is measured in months, with some in the industry seeing simple numerical impossibilities in deal-making; bid-ask spreads alone could take months to narrow. Jahn Brodwin, senior managing director of the Real Estate Solutions practice at FTI Consulting<\/strong>, sees this as the case. \u201cSome time will still need to pass before confidence returns to the marketplace for transactions to resume in earnest and the bid-ask spread narrows\u2014perhaps by end of third or fourth quarter 2023,\u201d he explained to CPE<\/em>.<\/p>\n

Robinson agrees and advises deal-makers to make deals only considering the current lending environment. \u201cGiven the number of factors influencing financial conditions, real estate participants need to remain focused on living within the current environment for the foreseeable future,\u201d he said.<\/p>\n

Winners and losers<\/h2>\n

The deals that do end up penciling out, usually in the hands of highly selective lenders<\/a>, are dependent on asset class, location and NOI safety. Here, the long-time industry winners and losers remain so<\/a>. \u201cIt\u2019s very property-type specific,\u201d detailed Trepp<\/strong>\u2019s research director, Stephen Buschbom. \u201cOffice is unlikely to see much of an uptick in deal flow while industrial and multifamily could benefit the most.\u201d<\/p>\n

Within these deals, lenders are likely to underwrite based on current market fundamentals, which could vary widely given the market\u2019s extant volatility. \u201cIf investors believe that the Fed\u2019s actions have gone too far, tipping us into a severe recession, odds are that those investors will command a higher cap rate to compensate for their perceived risk in the CRE fundamentals,\u201d Kenny explained. \u201cConversely, if they feel that the Fed can navigate a \u201csoft landing\u201d or mild recession, it may push them to jump in sooner,\u201d he added.<\/p>\n

Success in this environment is not only dependent on asset specifications and the sentiments of lenders, but by the capabilities and resources of the buyers. Concurring with Buschbom\u2019s assessment, Rockey said, \u201c(It) means that unleveraged buyers with ample liquidity still have a unique period to target some opportunistic and value-add deals, where they come available.\u201d However, this is only for a limited time. \u201cWhen certainty returns and as a recession recedes, that window will vanish quickly,\u201d she concluded.<\/p>\n

Some deals may even be long-term bargains, especially if prices rise when Rockey\u2019s window of opportunity for some buyers closes. \u201cThere is a reasonably good probability that in 2024 or 2025, rates will come down off the peak,\u201d Brodwin detailed. \u201cSo, it may be viewed as a good time to buy now when prices hit bottom and refinance opportunities will be around the corner,\u201d he concluded.<\/p>\n","protected":false},"excerpt":{"rendered":"

The Fed’s next move depends on economic data, experts say. <\/p>\n","protected":false},"author":3012,"featured_media":1004667407,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21808,21825,21783,23891,21742],"tags":[51765,32799,52054,37237,52055,35305],"class_list":["post-1004667253","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-featured","category-finance","category-investment","category-national","category-latest","tag-bandon-capital-advisors","tag-cushman-wakefield","tag-federal-reserve-open-markets-committee","tag-fti-consulting","tag-matthews-capital-markets","tag-trepp-inc"],"acf":[],"yoast_head":"\nCRE Expects a Rate Hike Pause. Here's What It Means.\u00a0 - CPE<\/title>\n<meta name=\"description\" content=\"The industry widely anticipates a pause at the Fed's June meeting. 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