Analysts: Continued Low Interest Rates Could Benefit CRE

The Federal Reserve’s decision to hold interest rates steady came as no surprise–and should benefit commercial real estate, analysts said.

The Federal Reserve left the target  federal funds rate unchanged at 0.25-0.50 percent for a fourth consecutive meeting on Wednesday. 

Mortgage Bankers Association Chief Economist Mike Fratantoni said the Fed considered factors including jobs, housing and even the upcoming U.K. referendum on whether to leave the European Union when it held rates steady.

“Given the weak job market report for May, it was no surprise that the Federal Open Market Committee decided to hold the Fed Funds rate target unchanged,” Fratantoni said. “The committee noted that the pace of economic activity has picked up and there continued to be positive news with respect to the housing sector and consumer spending, but that the pace of job growth has slowed significantly.”

The Fed also noted other positive economic indicators on Wednesday, including reduced drag from net exports.

Spencer Levy, Head of Americas Research with CBRE, Los Angeles, said U.S. commercial real estate remains a favorable long-term investment, especially in the continuing very-low interest rate environment. “As investors seek the sweet spot of high yields and low risk, the Fed’s ‘lower for longer’ policy should stimulate capital flows into these assets,” he said. 

But Levy noted that the Moody’s/RCA Commercial Property Type Index declined during the first quarter and the historically low cost of long-term Treasurys indicates that investor sentiment remains uncertain. “The real estate investment cycle as a whole likely has a few more years of growth, but risks and opportunities will become more nuanced,” he said.

Levy said absent the poor May jobs report, the Fed’s decision “would have been a close call.” The May jobs report revealed that the U.S. economy added just 38,000 jobs last month. “The economy has consistently underperformed Fed expectations this year, forestalling the board’s original plan to raise rates three or four times in 2016,” he said, noting that the risk of persistently low inflation added to the Fed’s cautious policy stance.