What the Fed's Move Means for CRE

MIAMI—The Federal Reserve on Thursday opted not to raise the federal funds rate because of the recent global financial turmoil. That means interest rates won't rise—at least not right now.

While the Fed signaled that rates would increase by year end, the statement was not as strong as many expected, Michael R. Torres, founding member of the Miami-based accounting firm PAAST, tells GlobeSt.com. That, he says, leads to uncertainty as to the timing and extent of any rate hike by year end.

“The combination of no current interest rate hike and uncertainty about future tax policy should be a short-term catalyst for the real estate industry,” Torres says. “The impact on the South Florida real estate market, both on the commercial and residential sector, is a dichotomy.”

We all know foreign investors are driving much of South Florida's commercial real estate market, especially in pockets such as Coral Gables, Brickell, Miami Beach and Doral. These foreign investors have been acquiring assets mostly with cash. That could spell good news for Miami.

“The Fed's action does not have a significant impact on this sector,” Torres says. “On the residential side, foreign investors are acquiring properties as well. However, domestic buyers are also very active, both as investors and homeowners. Domestic buyers traditionally acquire properties through financing the purchase.”

To this extent, Torres says, the Fed's action has a profound impact. First of all, he notes, buyers will enjoy historic low rates for a few more months, which may trigger more aggressive pricing and closing times in order to close the sale before year end. Secondly, he adds, any interest rate hike at year end may very well be lower than if an increase would have be done now and a second increase before year end.

“From a macro point of view, one can understand the reason for the action by the Fed,” Torres says. “However, the upcoming election year may be having an impact on the Fed's decision as well. Many scholars believe that historical interest rate changes in an election year are tied to the policy and reforms of the front-runner and, many times, leads to stability or more conservative action until the election is decided.”

Of course, he continues, tax policy also has an impact on commercial and residential real estate, and as stated before, we are entering into an election year. Those watching the debates have heard of phrases such as the "flat tax" and the "fair tax.” What does that really mean in the realm of commercial real estate?

“The flat tax would eliminate our current progressive tax system and charge one rate,” Torres says. “A true flat tax system would allow no deductions. Therefore, the benefit of deducting interest expense would be eliminated.”

Some candidates have also mentioned a fair tax, he says, which is a tax on consumption and not income. Therefore, there would be no tax benefit to incurring interest expense.

Where do we go from here? Torres says: “The country, the investment and financial community, now set our sights on the next Fed meeting on October 27-28, the first Democratic primary debate in mid-October and Republican debate coinciding with the Fed meeting.”

“From a macro point of view, one can understand the reason for the action by the Fed,” Torres says. “However, the upcoming election year may be having an impact on the Fed's decision as well. Many scholars believe that historical interest rate changes in an election year are tied to the policy and reforms of the front-runner and, many times, leads to stability or more conservative action until the election is decided.”

Of course, he continues, tax policy also has an impact on commercial and residential real estate, and as stated before, we are entering into an election year. Those watching the debates have heard of phrases such as the "flat tax" and the "fair tax.” What does that really mean in the realm of commercial real estate?

“The flat tax would eliminate our current progressive tax system and charge one rate,” Torres says. “A true flat tax system would allow no deductions. Therefore, the benefit of deducting interest expense would be eliminated.”

Some candidates have also mentioned a fair tax, he says, which is a tax on consumption and not income. Therefore, there would be no tax benefit to incurring interest expense.

Where do we go from here? Torres says: “The country, the investment and financial community, now set our sights on the next Fed meeting on October 27-28, the first Democratic primary debate in mid-October and Republican debate coinciding with the Fed meeting.”