CBRE: Fed Rate Decision Could Benefit CRE

The Federal Reserve’s decision to hold benchmark interest rates between 0.25 percent and 0.5 percent should improve commercial real estate borrowing conditions, said CBRE, Los Angeles.

“Holding rates steady is the Fed’s attempt to calm market volatility,” said CBRE Head of Research for The Americas Spencer Levy. “Although holding rates will have minimal impact on short-term base rates or the long end of the curve, a period of less volatility could compress credit spreads, improving borrowing conditions in commercial real estate.”

Levy called the Fed’s decision not to raise rate “widely expected” given significant market volatility in January and February. “[This] was signaled by the dovish tone of Federal Open Market Committee members in recent speeches,” he said.

The Fed did not change its overall game plan significantly, Levy noted. “The decision to delay a rate hike now is a risk-management play–better to wait and see how the next few months unfold than to make a costly mistake,” he said, noting significant employment gains including 242,000 new jobs created in February. “Hawkish Fed officials are concerned that the U.S. economy may overshoot on inflation–indeed, there was one dissenting vote to raise rates 25 basis points in March.”

The Fed’s changes to forward guidance were dovish, signaling a “lower for longer” rate path, Levy said. “The updated interest rate projections imply that the [rate-setting] Federal Open Market Committee now anticipates fewer increases in 2016–it expects two hikes instead of four, a meaningful revision from its December projections,” he said.

U.S. commercial real estate remains a favorable long-term investment against this lower for longer backdrop; Levy said: “The [CRE] market has proven to be less fickle in sentiment than the broader financial markets.” He noted that CBRE surveys conducted near the height of market volatility in late January and early February indicated that most institutional investors expect to maintain or increase their acquisitions in 2016. “That said, the prices they are willing to pay may be at an inflection point,” he said. “The Moody’s/RCA Commercial Property Type Index declined in January for the first time since 2010.”