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 factor that may have influenced this suggestion was the Bureau of Labor Statistics’ report for July 2024, which showed an increase in unemployment to 4.3% and only 114,000 jobs added.
Although no official announcement has been made about a rate cut in September, Marcus & Millichap’s John Chang noted that Wall Street is already reacting by lowering their expectations for interest rates and reducing their spreads. This decrease in cost of debt capital combined with lower property values and higher cap rates has created an attractive investment climate.
Chang also pointed out that lenders are now more confident that the Fed has completed its tightening cycle and are therefore reducing their spreads as well. The spread between ten-year Treasury yields and average cap rates is widening across different asset types: office (390 basis points), industrial (310 basis points), retail (300 basis points), self-storage (280 basis points) ,and multifamily properties(200 basis points).
While there may be concerns about office properties due to high cap rates compared to other asset types, Chang believes this spread will attract investors’ attention over time. He also notes that at the beginning of 2024 there was significant capital waiting on sidelines but it has since begun deploying into commercial real estate deals.
To determine if investing now would be beneficial given potential changes from a rate reduction by The Fed., Chang suggests asking yourself these questions:
1) Do you believe The Federal Reserve will lower interest rates?
2) Do you think this reduction will stimulate economic growth?
3) Will increased demand for commercial real estate result from these factors?
Additionally he advises keeping an eye on longer-term market trends before making any investment decisions.
