Fed Leaves Interest Rates Unchanged and Signals 3 Cuts in 2024
Federal Reserve Chair Jerome Powell has wrapped up a gift for the CRE market to maintain its short-term interest rates steady as 2023 ends, signaling a potential shift in commercial real estate transactions heading into 2024.
1. Slow and steady:
In the final meeting of the year, the benchmark interest rate remained at 5.25-5.5%, unchanged for three consecutive meetings after peaking at a 22-year high in July. Despite past increases to tackle inflation, the Fed plans to cut rates 3x in 2024, reflecting eased but still elevated inflation levels. Chairman Jerome Powell emphasizes a cautious approach, balancing policy firming and the need for flexibility in response to economic data and risks.
2. What it means for Commercial Real Estate:
Analysts predict a slow start in CRE transactions for early 2024, with potential acceleration in the latter half if interest rates decline. Moody’s Analytics forecasts 2-3 rate cuts, starting late in Q2 of 2024. A steady decline in interest rates is anticipated, with the Fed funds rate predicted to normalize between 2-3% and the 10-year Treasury rate around 4-4.5%. This downward trajectory, evident in the recent drop of the 10-year Treasury rate, is expected to revitalize the CRE capital market, especially in refinancing distressed properties.
3. THE TAKEAWAY :
The market anticipates deeper rate cuts than the Fed's projections, suggesting a more significant decrease in the federal funds rate by the end of 2024. Such a trend could ease pressures on long-term debts, offering flexibility in the refinancing market. The higher borrowing conditions experienced so far have also benefited well-capitalized sponsors, reducing competition. This financial landscape sets a unique stage for CRE in 2024, balancing cautious optimism with the need to find new deals.
4. Why it Matters to Multifamily Development?
The optimal timing is crucial. Upon finishing construction and securing tenants for the property, potential buyers can anticipate a more favorable lending environment. This strategic timing enhances the profitability of the developers' exit from the property, as its value increases when lending rates are low.
Source: CRE Daily, November 28, 2023