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Why Upcoming Fed Policy Changes Reinforce Positive CRE Outlook

Earlier this week, CNBC interviewed Marcus & Millichap’s President and CEO Hessam Nadji to discuss why upcoming Fed Policy changes and strong fundamentals reinforce a positive commercial real estate (CRE) outlook. Some major takeaways from the interview include:

  • Lower rates energize the market, Fed rates shifted from a headwind to tailwind.
    • Nadji explains how a Fed reversal turned what was considered a negative policy change at the end of last year into a positive one this year by stating, “The fed is now so accommodative in messaging that they’re going to be facilitating the life of this expansion, and not becoming a headwind to it. And of course, lower rates lubricate the market. “
  • Lack of overbuilding has resulted in a longer positive outlook for CRE.
    • Nadji attributes a lack of overbuilding in commercial real estate to the boom of E-commerce.

“Office space, for example, has been adding about 1/3 to 1/2 of new product compared to the prior peak of the cycle. Look at retail space in reaction to whats happened to E-commerce. The volume of any kind of retail being built is less than a 1/3 of what it was year-over-year prior to the last recession. That lack of overbuilding plus an economy that’s adding over 2 million jobs a year consistently in a low-interest-rate environment all spells a pretty good outlook for CRE.”

  • Tech expansion boosts demand for industrial real estates like warehouses, distribution centers, or storage facilities. E-commerce has been tough on traditional retail.
    • Tech-oriented metros experiencing increased rental demand for new hires.

Click here to watch the full four-minute CNBC interview with Marcus & Millichap’s President and CEO Hessam Nadji

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Traders Confident of Interest Rate Cut in July

Last week, an unprecedented amount of traders in the fed funds futures market made bets with high expectations of an interest rate cut in the near future.  The high volume of trading came as no surprise as many traders had already expressed confidence in the first quarter that a rate cut was coming. Their confidence only increased after the post-Federal Open Market Committee statement and forecasting materials pointed to a possible rate cut in the coming months.

According to CNBC’s Jeff Cox, “The market now sees a 100% chance of a rate cut at the July 30-31 meeting, up from 85% a week ago and just 15% a month ago. For the full year, the expectation for three cuts is 66% up from 59% a week ago and a mere 4% last month. ”

The record-setting volume of trading was fetched at the end of the week after the central bank concluded its two-day policy meetings. The week’s volume was tracked above 3.5 million contracts, easily topping the best week ever in May 2018 at 1.19 million contracts.

Click here to read the Traders This Week Bet on a Fed Rate Cut in Record-Setting Numbers article in its entirety 

 

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Federal Reserve Raise Interest Rates

As many real estate professionals expected, the Federal Reserve increased interest rates to a range between 1.25 and 1.5 percent. This is the third increase of the year with the last one coming in June.

The chief economist at Jones Lang LaSalle (JLL), Ryan Severino, expressed his minimal concern by stating, “We have been hiking rates for the last two years with no discernable impact on commercial real estate. That is because the economy continued to grow quickly enough over the last two years to support real estate even in the face of rising rates.”

That is not to say Severino doesn’t have his reservations. He highlighted the fact that rates increasing too quickly could stall economic growth and do considerable damage to the commercial real estate sector. In addition, as interest rates continue to rise, the cap rate spreads will continue to compress. Having said that, industry pundits believe the economy is strong enough to absorb the rate increase. 

According to reports from the Wall Street Journal, rates will continue to slowly increase in the coming term(s) with officials planning three quarter-point rate increases followed by hikes in 2019 and 2020. The projections for 2018 remain positive, as bank officials expect the U.S. economy to grow by 2.5,  and continue growing through 2020.

Chair of the Federal Reserve, Janet Yellen, offered her confidence in the projections and growth in a news conference, “The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years we’ve seen this… I feel good about the economic outlook.” She also provided reassurance by noting the economy’s growth is not built on a massive amount of unsustainable debt, unlike another not-so-distant time of economic growth.

Click here for more information on rate increases and upcoming term projections:

The Wall Street Journal: Fed Raises Rates, Sticks to Forecast for 2018 Increases

Board of Governors of the Federal Reserve System press release