The Federal Reserve’s Federal Open Market Committee has maintained the federal funds rate at 5.25%-5.5% since last July, as expected by industry leaders in the commercial real estate sector. Tower Capital’s co-founder and managing partner, Adam S. Finkel, notes that both lenders and borrowers have adapted to this higher-for-longer Fed scenario through recalibrating their expectations and strategies.
Finkel explains that lenders have adjusted their underwriting criteria to mitigate risk in light of elevated rates while borrowers have become more strategic with shorter-term loans for flexibility when rates eventually decrease. Cox, Castle & Nicholson’s partner Adam Weissburg emphasizes the importance of curve stability rather than rate itself when underwriting deals.
Initially anticipating multiple reductions throughout 2024, only one is now expected following June’s meeting according to FOMC indications – a significant change from earlier predictions of six cuts between January and June.
As such, Finkel predicts that any major changes in the lending landscape will not occur until late 2024 or even into 2025 due to signals from the Fed regarding monetary policy shifts based on economic indicators like inflation and employment rates.
Weissburg believes product type will determine how much change we’ll see in CRE financing status quo – office assets may require repricing as seen with foreclosures while multifamily properties are gaining momentum but still need further reduction in interest rates for stabilization.
BGO chief economist Ryan Severino argues against keeping interest rates high for too long due to lagged or incorrect inflation measures influenced by expensive housing prices skewed data compared globally where other G7 nations do not include owned-housing “rent” metrics despite facing similar shortages.
