CRE Could Benefit From The Fed Cutting Interest Rates To Near-Zero Levels — If Things Reopen
In an attempt to boost the vulnerable U.S. economy during the coronavirus pandemic, the Federal Reserve Sunday slashed interest rates by a full percentage point to nearly zero.
That could put more cash in the pockets of real estate developers and consumers.
In a series of statements Sunday afternoon, the Fed announced it would cut the federal funds rate from 1.25% to a range between 0% and 0.25%, a historic low last seen during the 2008 financial crisis. The U.S. central bank will also increase its Treasury securities holdings by at least $500B and its holdings of mortgage-backed securities by at least $200B, according to one of the Fed's statements.
“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected,” the Federal Open Market Committee said in a statement. “The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.”
Lowering interest rates make it cheaper to borrow money, and the most tangible benefit to real estate could come to the housing sector with mortgage rates.
After the Federal Reserve lowered the federal funds rate earlier this month to a range of 1% to 1.25%, mortgage rates fell to their lowest since tracking began in 1971. The average 30-year fixed mortgage was 3.29% the week of March 5, HousingWire reports.
The Fed said its moves Sunday were aimed at supporting the flow of credit to both households and businesses, which could also benefit commercial real estate companies looking to refinance loans.
“The Fed cutting its rate to near zero is a major ‘gift’ to owners of commercial real estate,” O’Connor Capital Partners President Joel Bayer said via email. “This will result in rates on real estate loans being lowered to interest rate levels which we have never seen in our lifetimes. Every existing loan that can be refinanced at a lower rate will be processed as soon as possible. This will translate into lower interest rate expenses and more net cash flow to the asset owner.”
Retailers and retail landlords could also benefit. Lower interest rates on credit cards, student loans and automobile financing give consumers more money to spend, Bayer said.
“The only issue is that banks are swamped at the moment,” Bayer added. “Many bankers are currently working from home, which is slowing down the process of expediting refinancing. So, there may be a delay during this period before all the debt is refinanced and the impact of the lower rates is felt in the economy.”
Consumer spending also hinges on shoppers being out spending money and on developments being allowed to open.
Many state governments are severely curtailing operations at restaurants, bars and other public spaces. Massachusetts Gov. Charlie Baker ordered restaurants Sunday to only conduct takeout operations and not offer in-store consumption beginning on Tuesday for three weeks. He also lowered the threshold on gatherings from 250 to 25. Leaders in Ohio, Illinois, Washington and New York City have also ordered bars and restaurants to close. California Gov. Gavin Newsom ordered bars to shut down, but said restaurants could remain open at half their normal occupancy levels.
Meanwhile, customers are largely staying at home in order to follow public health guidelines to “socially distance” and self-quarantine to avoid potential spread of the coronavirus. They could stay home for a while, too. The U.S. Centers for Disease Control and Prevention recommended Sunday that no gatherings of 50 or more people take place for the next eight weeks.
“What does a Fed rate cut mean for commercial real estate? Steady as she goes, that’s what it means,” CBRE Senior Economic Advisor Spencer Levy said in July when Fed Chairman Jerome Powell indicated he was planning to cut rates for the first time in a decade. “If we don’t see one, there will be a fall in business consumer sentiment, which will negatively impact the industry.”
But that stance was pre-coronavirus and also when many investors were anticipating a 0.25% rate cut, a modest move compared to Sunday’s full percentage point drop. While the more aggressive monetary policy may not deliver CRE a windfall, the industry is still hopeful it will be a tailwind during uncertain economic times.
“A Fed rate cut doesn’t have a significant impact on the Treasury rates that much of CRE prices over,” Boston-based Berkadia Senior Director Gemma Geldmacher said Sunday to Bisnow via email. “But the rate cut is one of the most powerful tools in the Fed’s arsenal, and hopefully it incentivizes the continued bull run we’ve been having in the CRE markets. Frankly, I’m more worried about the lack of economic activity stemming from all the closures in various states like Massachusetts.”