WASHINGTON, DC–To little surprise the Federal Reserve decided to stand pat on its monetary policy following its latest Federal Open Market Committee meeting, leaving short-term interest rates unchanged. Fed Chair Janet Yellen took pains to say that the Federal Reserve had confidence in the US economy but the Central Bank concluded that with inflation still underneath its 2% target, it was safer to let rates remain at their current level. “It's better to err on the side of caution,” Yellen said.

To underline the reasoning behind its decision, the Fed downgraded its forecast for economic growth in 2016 to 1.8% from 2% that it had projected in June. This is the third time it has revised its forecast.

The decision to keep rates unchanged was not a unanimous decision, indeed the dissent among the governors is growing louder with each passing quarter, leading economists and observers to conclude that there probably will be a rate increase by the calendar turns on 2016.

All of us, of course, have seen this movie before – multiple times. The market has lost confidence in the Fed being able to signal its true intentions after having hinted multiple times that a rate increase was coming. Soon.

For the real estate industry, though, there was a twist in the routine this time. Following the announcement about interest rates, Yellen took questions from the press during which she was asked about “the global reach for yield and whether the committee saw that as a cost to its accommodative policy right now.”

As part of her response, she pointed to commercial real estate, per a transcript published by Market News International:

In general, I would not say that asset valuations are out of line with historical norms. But there are areas, my colleague President Rosengren has focused on commercial real estate where price to rent are very high and cap rates are very low. That's something that has caught our attention.

The Fed raised concerns about commercial real estate valuations in June as well, in its semiannual Monetary Policy Report to Congress. Valuations “appear increasingly vulnerable to negative shocks, as CRE prices have continued to outpace rental income,” it said.

In this latest mention, Yellen did not signal the Fed or other regulatory agencies would take action to reign in valuations. She said:

We have a variety of tools, other than monetary policy, to address such risks. We've recently issued new supervisory guides. I would say that in real estate, while values are high, we are seeing some tightening of lending standards and less debt growth associated with that rise in commercial real estate prices. But more generally, we're not seeing signs of leverage building up or maturity transformation in the way that we saw the in the run-up to the crisis and we're keeping a close eye on it.

Left unsaid was the role the record long period of ultra low rates has played in real estate's inflated valuations.

More than 300 of the industry's leading national investors, REITs, banks, private equity firms, asset management firms and other institutions will join us as we explore the market conditions behind the trends at this year's RealShare National Investment & Finance, scheduled for Oct. 5 and 6 at the Roosevelt Hotel in New York City. Learn more.

As part of her response, she pointed to commercial real estate, per a transcript published by Market News International:

In general, I would not say that asset valuations are out of line with historical norms. But there are areas, my colleague President Rosengren has focused on commercial real estate where price to rent are very high and cap rates are very low. That's something that has caught our attention.

In this latest mention, Yellen did not signal the Fed or other regulatory agencies would take action to reign in valuations. She said:

We have a variety of tools, other than monetary policy, to address such risks. We've recently issued new supervisory guides. I would say that in real estate, while values are high, we are seeing some tightening of lending standards and less debt growth associated with that rise in commercial real estate prices. But more generally, we're not seeing signs of leverage building up or maturity transformation in the way that we saw the in the run-up to the crisis and we're keeping a close eye on it.

Left unsaid was the role the record long period of ultra low rates has played in real estate's inflated valuations.

Instant Insights /

Fed Chair Janet Yellen Singles Out Commercial Real Estate at Press Conference

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