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Rate Drop Should Help Commercial Real Estate Market
The decision yesterday by the Federal Reserve’s Open Market Committee to reduce the federal funds and discount rates by 25 basis points is likely to have a net positive influence on commercial real estate, according to an industry expert.
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, says Bob Bach, senior vice president, national director of research.
Nevertheless, the rate reduction 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, Bach says.
An interest rate cut by the Fed will normally take six to nine months to work its way through the economy and thereby boost activity, so leasing markets are unlikely to see much of an impact right away. But if the Fed’s action is successful in forestalling a recession or even shortening one, it will ultimately help support commercial real estate fundamentals such as vacancy rates, rental rates and net absorption of space.
On balance, the Fed’s action should provide additional confidence to commercial real estate buyers, sellers, lenders, borrowers and tenants, Bach says.