Despite Tapering, Fed Remains Dovish
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CALABASAS, CA-Even as the eventual end of quantitative easing is viewed alternately with apprehension and relief, the Federal Reserve is taking its foot off the accelerator gradually rather than slamming on the brakes. “While the taper will likely lead to modestly higher interest rates, the Fed’s stance remains dovish and leaves the door ajar for future intervention,” writes Hessam Nadji, managing director, research and advisory services at Marcus & Millichap Real Estate Investment Services. Nadji made his observations in a research brief issued after the Fed announced last week that it would cut its monthly purchases of bonds and securities by $10 billion in January.
The Fed’s move did not occur out of the blue, Nadji points out. “The token reduction in bond and securities purchases follows a series of positive reports suggesting the economy is better positioned to mount a self-sustaining recovery,” he writes. “Third quarter GDP growth significantly exceeded expectations, job gains have surprised to the upside, retail sales have been solid and the housing market appears to be on solid footing.”
Further, the budget deal reached in Congress promises to offer “fiscal stability for the coming two years, removing risks of another government shutdown and additional sequestration,” Nadji writes. “More importantly, the budget deal will eliminate some of the brinkmanship that heightened uncertainty and stymied economic performance.”
Consistent with its recent modus operandi regarding QE, the Fed declined to specify exactly when the program would come to an end. “This will moderate risks of overreaction by equity and capital markets, though some uncertainty will persist,” Nadji observes. Should the economy continue to gather steam, the Fed may announce further reductions to its asset purchases when chairman Ben Bernanke convenes his last meeting of the Federal Open Market Committee late next month.
Nadji predicts that the Fed’s announcement this past Wednesday will have “little immediate impact” on CRE investments. “Although the rates on the 10-year Treasury will likely drift upward, cap rates for most commercial assets will remain contained as spreads tighten for both the competitive lending institutions and buyers,” he writes.
Only properties "with very low cap rates, such as premium net leased assets or top tier apartments in prime markets, face a potential lift in cap rates in the short term,” writes Nadji. That being said, he sees “nominal” movement at most for these “best-in-class properties with ultra-thin spreads.”
Nadji’s observations square with what other industry experts expressed to GlobeSt.com’s Erika Morphy in the immediate aftermath of the QE announcement. “Everyone in the markets understood that the Fed couldn’t grow its balance sheet by a trillion a year in perpetuity,” Brian Olasov, managing director of McKenna Long & Aldridge LLP, told GlobeSt.com last week. “This is the shoe that had to drop.”
Further, Olosav noted, it’s understood that additional tapering will be tied to an increased economic pace. “That additional economic activity translates into a higher demand for CRE, which should push rental revenues,” he said.
For an irreverent take on the macroeconomic environment, check out GlobeSt.com's Chief Economist authored by Dr. Sam Chandan.
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