November Fed Meeting Updates & CRE Impact
This last week the Federal Reserve raised the overnight rate by .75% (75 bps is how you may hear this shared in the finance world. It sounds like “bips”). This takes the federal funds rate to the 3.75% to 4% which is the highest it has been since the start of 2008.
This rate increase was choreographed well ahead of time and was expected per the federal reserves’ prior announcements and it was priced gradually into the market.
There were 3 key takeaways from the latest fed meeting, today we will break those down.
The Fed moving rates going forward
Jerome Powell made the suggestion that the Fed is done front-loading rates. The front loading of rates and the large moves of 75 bps are less likely moving forward.
Powell did share that a 50 bps increase should be expected in December, and 75 bps is still on the table and being discussed if necessary. Powell said that “at some point, it will become appropriate to slow increases.”
Powell also said, “incoming data suggest that the ultimate level of interest rates will be higher than previously expected.” The fed also took time to acknowledge the time lag about the rate movements and the impact on the economy.
The takeaway from these comments is that the increases in rates while smaller will continue to be raised higher than originally thought.
What this means for commercial real estate investing
This means a few things for commercial real estate investors. For starters, rates could continue to increase over the next year which means that debt capital will become more expensive. So get in a deal NOW rather than waiting till later. Growth VUE Properties has one offering available that we locked in rates in September before the latest hike. We are VERY happy with the rates and the price reduction that was negotiated due to the rising interest rate atmosphere. If you were planning on buying your own property at the end of this year, but you’re finding it hard to pencil out a deal, then look at placing your capital in a passive investment that is already locked in and performing.
The slowing of rising interest rates will create some clarity between buyers and sellers. While this will take some time to fully adjust, we expect that sellers’ and buyers’ expectations on price points will become closer in the next 6-12 months.
As of now, the market is experiencing a form of whiplash. Within 90-day windows from when a property is put under contract to the closing date, there is a chance fo 127-165 bps variance in rates based on this year’s data. See the above below from Marcus & Millichap. Once the rates settle down we expect that this whiplash will also settle down. This is another good reason to passively invest with Growth VUE’s Dallas Offering, as this deal is already closed, with a fixed rate, and we are selling off equity. Click here for investment details and to invest.
Fed comments on Labor Markets
Powell said that “reducing inflation will likely require a sustained period of below-trend growth and some softening of the labor market.” He also shared that “the labor market is strong and households have strong balance sheets. So it may take time to get inflation down.”
This reiterates one of the points that Powell made on September 21 regarding the unemployment rate needing to rise. This would cause the fed to encourage more job loss to get inflation down. The fed has a job to beat inflation and they are willing to put it into a recession if needed. We will see the most job losses in the hourly paycheck earners that normally reside in C-Class and D-Class neighborhoods. Growth VUE business model is to only invest in B-Class and older A-Class assets that see less than 5% unemployment even through recessions due to its strong base of seasoned blue-collar tenants or newly established white-collar tenants
Finally, when a reporter asked if a soft landing is happening or possible. Powell said it is possible. While it is difficult no one knows how bad it can be. The fed wants to create price stability so that labor markets can benefit more over time. A soft landing means that it will be a smooth transition to a recession and back to a growth environment.
The fed has the plan to bring inflation back down to 2% and said they will use the tools at their disposal. When investing always consider long-term looking out 3-5 years. These rate hikes directly impact technology companies alongside real estate. Tech layoffs are not slowing down, investing in recession-resilient commercial real estate is a strong way to protect capital during times of uncertainty and volatility. Speak with our team this week and learn about how commercial real estate can diversify and stabilize your portfolio.
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