Is CRE Poised to Bounce Back Following Fed Rate Cuts?
Last week, the Federal Reserve lowered the benchmark interest rate by another 0.25 percent. It’s too soon to know how the most recent cut might impact the real estate market, but it’s worth remembering that — less than two months ago — many observers thought the Fed’s September cut would jumpstart the housing market.
However, home sales actually dipped (slightly) following the cut while housing prices climbed. Counterintuitive perhaps, but the National Association of Realtors (NAR) said it was unsurprising given market conditions. “There are more inventory choices for consumers, lower mortgage rates than a year ago and continued job additions to the economy,” said NAR Chief Economist Lawrence Yun. He added that the then-looming presidential elections likely contributed to the home buyer wariness.
But it appears that the September cut may have been exactly the jolt the commercial real estate (CRE) market needed to exit its post-pandemic slump, at least according to analysts. JPMC said the September cut could trigger increased liquidity that may ultimately prove beneficial for both commercial real estate and multifamily properties.
When rates rise, JPMC reasoned, cash flow is thin, forcing commercial property lenders to tap into additional reserves against their portfolios. But, when interest rates decline, “cash flow coverage increases, bringing down loan loss reserves for banks. Lower reserves can then be put back into the market and facilitate more deal flow.” This could translate into attractive refinancing opportunities, JPMC said in September.
“Falling rates can be especially beneficial for [multi-family] investors with loans near the end of their term. By refinancing, investors can lower their monthly payments and potentially save thousands of dollars in interest. Property refinancing can also help improve cash flow and free up capital for renovations or new building purchases.”
Deloitte analysts were equally bullish on the CRE market thanks to a survey it conducted with more than 880 CRE executives around the globe. The survey results offered “some indication that commercial real estate owners and investors are hopeful that 2025 will emerge as a year of potential recovery over two years of muted revenues and pullbacks in spending.” Eighty-eight percent of respondents told Deloitte they “expect their company’s revenues to increase going forward.” This optimism marked quite a turn from a year earlier when 60 percent of CRE executives said they anticipated revenue declines.
“While their companies may be coming off muted baseline financial performances across the real estate industry last year, the turn in revenue sentiment could indicate that global real estate executives expect better prospects ahead,” said Deloitte.
Wells Fargo researchers were even more upbeat in their projections, saying the September cut marked “the beginning of the end of the worst CRE downturn since the Global Financial Crisis.” Acknowledging lower rates alone “are not a magic bullet,” Wells Fargo still believed the September cut laid “the groundwork for a commercial real estate recovery.”
However, the bank added that the CRE market still has a long way to go. “There's no shortage of obstacles ahead, especially when it comes to the office market,” said Wells, but “reduced interest rates should prevent distress from spreading and shorten the hurdles coming down the road.” Despite that note of caution, Wells Fargo’s ended on this sunny note: “All told, it has been a tumultuous few years, but the tide finally appears to be turning for commercial real estate.”
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