X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.

(Read more on the debt and equity markets.)

WASHINGTON, DC-Citing an intensification of the housing correction, and increase in energy and commodity price, the Federal Open Market Committee is lowering its target for the federal funds rate 25 basis points to 4.5%. This cut follows one in September, the Committee lowered its target for the federal funds rate by a larger than expected 50 basis points to 4.8%, as GlobeSt.com previously reported.

The earlier cuts by the Federal Reserve Board were widely lauded not only in the commercial real estate industry, but throughout most sectors in the economy. Indeed, anecdotally at least, there was a sense that the credit crunch was easing after the first drop in interest rates. That was then, though. This time around, not many players are expecting to see a huge impact.

“I don’t think this cut is going to produce any noticeable change,” Jim Spitzer, a partner in Holland & Knight’s Real Estate Section and co-chair of the Institutional Investment Group tells GlobeSt.com. “The issue now is not so much where interest rates are as it is a question of liquidity or availability of loan financing and the amount you can borrow.” While interest rates have remained constant and even decreased, he notes, spreads are significantly higher than they were even a short while ago.

Lenders are more cautious and they have reduced the amount they are willing to lend on any given project, he says. “Clients used to borrowing 85% of required funds are finding that only 65% is available.”

Bob Bach, SVP and national director of research, for Grubb & Ellis, by contrast, does think the latest cut will have a net positive influence on commercial real estate. “A drop of 25 basis points in the federal funds rate could make construction loans, adjustable rate loans and other loans sensitive to shorter-term interest rates more affordable, thereby providing more liquidity within the industry,” he says.

That said, he continues, “it may not have much impact on the 10-year Treasury, against which many commercial real estate loans are priced based on a spread, and it could, ultimately, cause long-term rates to move higher if lenders become concerned about inflation and the weak dollar.”

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors in London also views the interest rate cut as having a muted affect. “The news was not wholly surprising. I think the market had pretty much already discounted it,” he tells GlobeSt.com. “Fundamentally the immediate concern is that there is still more bad news for the US economy coming, most likely, and that will continue to dampen sentiment towards commercial real estate.”

More worrisome are the results of a CRE semi annual global survey that the Institution is getting set to release. “Granted, it was conducted over a period of time when the news flow was quite negative, but it suggests that expectations in terms of US property market are quite downbeat. I don’t think further interest rate cuts of the magnitude we saw yesterday will do much to change that mood.”

Indeed, the Committee itself suggested that few if any more cuts would be forthcoming. “The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth,” it said in a statement. “The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.”

Want to continue reading?
Become a Free ALM Digital Reader.

Once you are an ALM digital member, you’ll receive:

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 3 free articles* across the ALM subscription network every 30 days
  • Exclusive discounts on ALM events and publications

*May exclude premium content
Already have an account?

GlobeSt

Join GlobeSt

Don't miss crucial news and insights you need to make informed commercial real estate decisions. Join GlobeSt.com now!

  • Free unlimited access to GlobeSt.com's trusted and independent team of experts who provide commercial real estate owners, investors, developers, brokers and finance professionals with comprehensive coverage, analysis and best practices necessary to innovate and build business.
  • Exclusive discounts on ALM and GlobeSt events.
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com.

Already have an account? Sign In Now
Join GlobeSt

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.