{"id":1004673193,"date":"2023-07-24T02:55:02","date_gmt":"2023-07-24T10:55:02","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004673193"},"modified":"2023-08-02T06:12:39","modified_gmt":"2023-08-02T14:12:39","slug":"fed-rate-hike-ahead-whats-in-it-for-cre","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/fed-rate-hike-ahead-whats-in-it-for-cre\/","title":{"rendered":"Fed Rate Hike Ahead. What’s in It for CRE?"},"content":{"rendered":"
\"\"<\/a>

Federal Reserve Chairman Jerome Powell speaks at the June 14 press briefing. Screenshot of Federal Reserve livestream by Gabriel Frank<\/em><\/p><\/div>\n

Experts across commercial real estate widely predict another 25-basis-point increase in interest rates at the Federal Reserve Open Markets Committee<\/strong>\u2019s next meeting on July 26, which would bring the funds rate up to 5.25 to 5.5 percent. In turn, its impact on deal making, as well as effects on various commercial real estate sectors remain significant, contributing to sharp decreases in property values, lending and transaction volumes as well as ever more strict underwriting standards. At the same time, the economy’s relative resilience is an indicator of an eventual future of post-pandemic business.<\/p>\n

Stubbornly focused<\/h2>\n

The expected increase, following last month\u2019s pause<\/a>, is slated to take place as the economy continuously cools, with headline inflation<\/a> slowing to 3.1 percent and core inflation dropping to 4.8, their respective lowest since June and September of 2022. Despite the Fed\u2019s incremental successes in reducing core inflation, it has still raised its projections for 2023\u2019s peak funds rate to range from 5.5 to 5.75 percent, implying at least two more rate hikes before the end of the year.<\/p>\n

Additionally, persistent strength in the nation\u2019s job market has complicated the data further, with the unemployment rate<\/a> falling to 3.6 percent in June, an almost 50-year low. Over that same period, wage growth ticked up to 5.7 percent, a 10-basis-point increase from April, according to the U.S. Bureau of Labor Statistics.<\/p>\n

Despite the relative economic resiliency, the Fed\u2019s options remain both difficult and limited, especially as its sole objective for the moment is to reduce inflation to 2 percent. Taking the totality of the data into account, John Maurer, senior managing director & head of Portfolio Management for EverWest Real Estate Investors<\/strong>, said: \u201cPersistently high core inflation, coupled with the continued high labor employment rates, make it likely that the Fed will raise the rate by 25 basis points.\u201d<\/p>\n

Others see the labor market as an even sharper thorn in the Fed\u2019s side, with higher wages contributing to a stubbornly high inflation rate. \u201cWe have a labor market that has been shrugging off a higher-rate environment, and all of this factors into the Fed\u2019s decision to raise at least one more time,\u201d observed Josh Bodin, senior vice president of Securities Trading at Berkadia.<\/strong><\/p>\n

Lending lethargy<\/h2>\n

At present, lending across commercial real estate remains scarce, and barriers to entry stay stringent. There is not so much a shortage of actual capital to deploy on part of industry lenders, but inaccessible costs, made further worse by the high federal funds rate. \u201cThe key impediment to transaction volumes has not been the availability of debt, but the high cost of debt,\u201d explained Harsh Hemnani, an analyst at Green Street<\/strong>.<\/p>\n

\"\"

A chart depicting the ongoing demand for new commercial real estate loans. Graph and data courtesy of the U.S. Federal Reserve<\/p><\/div>\n

In turn, another rate hike would exacerbate the above, and reduce demand and dealmaking volumes even further. According to CBRE\u2019s Lending Momentum Index<\/a>, total loan closings nationwide have declined by 33 percent since the fourth quarter of 2022, equally attributable to inflation, as well as the repeatedly increased rates. \u201c(It) would likely further increase costs of capital for market participants and dampen demand for loans,” Hemnani added.<\/p>\n

The actual act of lending remains varied and largely contingent upon anticipated future market stability. Alongside inflation, key metrics that industry experts have been looking toward are five- and 10-year treasury rates, the stability of which could lead to more favorable underwriting, loan to value ratios and narrower bid-ask spreads. \u201cTransaction volumes have been and will continue to be depressed until the markets perceive that capital markets in general and the 10-year treasury in particular have stabilized,\u201d predicted Dori Nolan, senior vice president of Institutional Solutions at Berkadia.<\/p>\n

\n

READ ALSO: <\/strong>After Rate Hike Pause, CPE 100 Are Staying the Course<\/span><\/a><\/p>\n

\n

For existing loans, investors should keep an eye on maturities, particularly for assets imminently approaching a need for them. \u201cMaturing loans with less than 8 percent yield and significant lease rollover risk are subject to higher credit risk,\u201d noted Caglar Demir, an associate director of research at Moody\u2019s Analytics<\/strong>.<\/p>\n

What both the newer and ongoing struggles have resulted in is an environment of declining property values<\/a>, where buyers \u201c(expecting) lower prices and higher cap rates,\u201d at the same time lenders \u201cremain hesitant to realize losses unless they are forced to sell,\u201d according to Hemnani.<\/p>\n

Varying predictions<\/h2>\n

For the deals that do end up closing, the lenders\u2019 priorities remain assets in sectors with strong, reliable long-term cash flows, and these priorities do not show any sign of changing in the near future. \u201cLenders will continue to focus on cash flow and debt serviceability, and will remain highly selective, but can be highly competitive for deals they like,\u201d Henri Vuong, head of Real Estate Debt Investment Research at PGIM Real Estate<\/strong>, told CPE<\/em>.<\/p>\n

Consequently, Vuong sees more tech-focused commercial assets, such as data centers as attracting the most attention, especially as mainstream investors express interest<\/a> in allocating capital to the assets. \u201cOf the newer sectors, data centers are expected to benefit from the technological tailwind and adoption of AI,\u201d Voung said.<\/p>\n

Maurer attested to this trend directly, detailing his firm\u2019s prioritization of \u201cwell-priced seaport industrial assets,\u201d that are purchased in all-cash transactions, as well as select grocery-anchored retail properties, which have remained in high demand from institutional investors.<\/p>\n

Conversely, sectors such as office, that are encountering extant, long-term hurdles and high vacancy rates have a dim outlook, even optimistically. \u201cFor office loans, there is almost no debt capital available in the market today. For trophy assets with long-term leases, office borrowers may find a loan priced in the 6 percent range,\u201d Maurer detailed.<\/p>\n

These fundamentals, alongside tanking property valuations, have led some to have dire predictions for the sector. Office not only has to deal with all of the above, but a widespread preference on the part of tenants to not actually work within the spaces themselves. \u201cAs much as 40 percent of the core of retail and office corridors in the nation\u2019s cities could be rendered obsolete,\u201d predicted Doug Ressler, manager of business intelligence at Yardi Matrix<\/strong>. \u201cAn estimated $800 billion worth of real estate could be wiped out,\u201d he added.<\/p>\n

A light at the end of the tunnel?<\/h2>\n

Depending on the economy\u2019s performance through the rest of the year and into 2024, a resumption of higher transaction volumes, across the industry could be horizon. Key markers to look for are on the scope, scale and severity of a potential or ongoing recession,<\/a> as well as an eventual reduction of interest rates themselves, once the Fed rate reaches its peak. If the outlook and performance trend positively, particularly for treasury rates, Nolan believes \u201cthe flood gates of capital will begin to open again.\u201d<\/p>\n

Similarly, others view the recent data itself as positive indicators, highlighting a relatively healthy economy in the face of larger struggles. \u201cBased on our value projection\u2014except for office\u2014all other primary sectors including multifamily, retail and industrial will revert back to pre-pandemic value growth around 2024,\u201d Demir predicted.<\/p>\n

What all the involved parties need is certainty, the primary motivator for positive dealmaking sentiments. \u201cIf the Fed raises further but signals that is the last of this tightening cycle, then it would reduce uncertainty in the market and encourage transactions,\u201d Vuong said.<\/p>\n","protected":false},"excerpt":{"rendered":"

PGIM, Berkadia, Green Street, Moody’s and others weigh in. <\/p>\n","protected":false},"author":3012,"featured_media":1004667864,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21808,21825,22251,23891,21742,51037],"tags":[32894,40101,52054,39052,34231,34714,32785],"class_list":["post-1004673193","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-featured","category-finance","category-in-focus","category-national","category-latest","category-trends","tag-berkadia","tag-everwest-real-estate-investors","tag-federal-reserve-open-markets-committee","tag-green-street-advisors","tag-moodys-analytics","tag-pgim-real-estate","tag-yardi-matrix"],"acf":[],"yoast_head":"\nAfter a Pause, CRE Anticipates Another Rate Hike - CPE<\/title>\n<meta name=\"description\" content=\"Industry experts share observations and predictions about the present and future of deal making, in light of the Fed's decision.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/fed-rate-hike-ahead-whats-in-it-for-cre\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Fed Rate Hike Ahead. 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