In July, the Federal Reserve’s Federal Open Markets Committee made the decision to maintain the Effective Federal Funds Rate (EFFR). However, Fed Chairman Jerome Powell hinted at a possible rate cut in September depending on economic reports. One of these reports was from the Bureau of Labor Statistics in July 2024, which showed an increase in unemployment rate to 4.3% and added 114,000 jobs.
Although 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 reacting with a drop below 4% for the 10-year Treasury yield. In his recent video presentation as senior vice president and national director for research and advisory services at Marcus & Millichap, Chang stated that this news has sparked excitement among real estate investors and caused some movement within market conditions.
Chang also mentioned that lenders are becoming more convinced that tightening measures by the Fed have ended. As a result, they are reducing their spreads while debt capital costs are decreasing as well. This combined with lower property values and increased cap rates make commercial real estate deals more attractive to investors.
Accordingly:
– Office properties have seen an increase of up to 390 basis points.
– Industrial properties have seen an increase of up to310 basis points.
– Retail properties have seen an increase of up to300 basis points.
– Self-storage properties have seen an increaseofup280basispoints.
-Multifamilypropertieshaveexperiencedanincreaseof200basispoints.Changnotedthatwhileindustrialpropertieshaveseenawidercapspread,thisfiguremustbeconsideredsincethecategoryincludesvariouscommercialpropertytypes.Furthermore,eventhoughtheofficefiguresareconcerning,theincreasesoverthetenyearperiodarebeginningtoattractinvestors’interestsaccordingtoChang.
Looking ahead:
Atthebeginningof2024,Changnotedthatthere was a significant amount of capital interested in commercial real estate but remained on the sidelines. However, over the past few months, there has been a shift with some major transactions closing and “dry powder” being used to invest in properties. Chang also mentioned that this trend is expected to continue as competition for assets increases.
In conclusion:
Chang advised potential investors to consider the following questions before making any decisions:
– Do you believe that the Federal Reserve will lower rates?
– Do you think that rate reductions will stimulate economic growth?
– Do you believe this combination would benefit demand for commercial real estate?
– Are you prepared for increased competition when looking at potential investments?
Lastly, Chang suggested keeping an eye on long-term market outlooks while considering these factors.
