In July, the Federal Reserve’s Federal Open Markets Committee (FOMC) decided to maintain the Effective Federal Funds Rate (EFFR), but Fed Chairman Jerome Powell hinted at a possible rate cut in September depending on economic reports. One reason for this potential cut was the Bureau of Labor Statistics’ July 2024 report, which showed an increase in unemployment to 4.3% and only 114,000 jobs added.
While there has been no official confirmation from the Fed about a rate cut in September, Marcus & Millichap’s John Chang noted that Wall Street is already responding with a decrease in the 10-year Treasury yield. In his recent video presentation, Chang also mentioned that there is growing excitement among real estate investors as they see signs of market improvement following Chairman Powell’s comments and the latest job report.
Lenders are now more convinced that we have reached the end of tightening cycle by Fed and are reducing their spreads accordingly. This has also led to lower cost of debt capital for investors. Additionally, property values have slightly decreased while cap rates have increased enough to make deals attractive for investors.
Chang provided some insights into how different asset types are performing:
– Office: Cap spread at around 390 basis points
– Industrial: Cap spread at around310 basis points
– Retail: Cap spread at around300 basis points
– Self-storage: Cap spread at around280 basis points
– Multifamily:Capspreadataround200basispoints
He explained that although industrial properties may seem like they offer wider cap spreads than other assets types,it should be notedthat “industrial” covers various subtypes within commercial real estate.Additionally,the office sector may appear concerning,but it still offers good opportunities due to its higher cap rates comparedtothe10-yearTreasuryyield.Changalsohighlightedthegrowinginterestofinvestorsincommercialrealestateoverthepastcoupleofmonths,withsignificanttransactionsbeingclosedandthedrypowderofcapitalwaitingtobedeployedstartingtodrawdown.
In light of these developments, Chang suggested that potential investors consider the following questions:
– Do you believe the Federal Reserve will lower rates?
– Do you think rate reductions will stimulate economic growth?
– Will this combination be beneficial for commercial real estate demand?
– Are you anticipating an increase in competition for assets?
Chang also advised keeping a close watch on long-term market trends. With all these factors in mind, it seems like the commercial real estate market may be ready to turn around and present new opportunities for investors.
