Fed Slashes Interest Rates and Big Investors Return to the CRE Market

The 50 BPS Fed interest rate cut justifiably dominated the news this past week, and in the days/weeks leading up to that rate cut, there have numerous sources anticipating and calling out the return of large, institutional investors who've been absent from the CRE market during this past high rate period.

Federal Reserve Rate Cut (0.50%), at Long Last

• Big cut, but even bigger is the future trajectory for interest rates, which is lower than the Fed's previous projections. By a lot.

• Jerome Powell and the FOMC did not fully commit to future rate cuts, maintaining the Fed’s capacity to react to changing circumstances should they emerge.
• Powell’s remarks on the economy push back against assumptions that these lower interest rates are motivated by an incipient downturn. He acknowledged that inflation has not yet reached the 2% target but tended to frame the current slowing jobs numbers as an improvement in labor market tightness.
• More recent comments from Fed members:
• Austan Goolsbee, Chicago Fed President: "It makes sense to hold rates like this when you want to cool the economy, not when you want things to stay where they are."
• Atlanta Fed President Raphael Bostic: "Progress on inflation and the cooling of the labor market have emerged much more quickly than I imagined at the beginning of the summer."
• Minneapolis Fed President Neel Kashkari: "The balance of risks has shifted away from higher inflation and toward the risk of a further weakening of the labor market."

• The most recent CPI print does show continued progress in lowering inflation, but jobs numbers are tracking an upward trend in unemployment.
• What does this mean for apartment investors and commercial real estate investors more generally? There could be more deal activity in the near future from groups anticipating future rate cuts and higher CRE prices, but the real surge will likely take place in 2025, given the amount of time it takes for deals to progress.

Have the Floodgates Opened for CRE Investors?

• Green Street’s Property Price Index has recorded positive growth in CRE prices for the past several months, with the multifamily market among the top markets for monthly and annual price growth.

• Even before last week’s announcement from the Fed, Colliers reported that “Major Investors Are Returning to the Market.”
• Marcus & Millichap also notes that this new interest rate regime has “positive implications for investors and consumers” (subtle understatement), with a nod toward the resilient fundamentals in many different sectors (office excluded) and the ways in which lower interest rates can fuel demand among renters as well as investors.?
• With so much discussion on what the CRE investment market will look like when large institutional investors re-enter the market, is it worth hoping that cap rates and interest rates fall in line with pre-pandemic levels, or will increased investor attention push cap rates down?