Fed Rate Cut Could Boost CRE in Long Run

The Federal Reserve’s 50-basis-point rate cut in response to the coronavirus threat could boost commercial real estate in the long run, said CBRE, Los Angeles.

The Federal Open Market Committee lowered the target range for the federal funds rate by 50 basis points on Tuesday to aim for a range between 1.00 percent and 1.25 percent.

“The [corona]virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad, for some time,” said Fed Chair Jerome Powell. “We’ve come to the view now that it is time to act in support of the economy. I do know that the U.S. economy is strong and we will get to the other side of this; I fully expect that we will return to solid growth and a solid labor market as well.”

Powell said the rate cut should help support overall economic activity.

“The last time rates were this low was in June 2017 and the last time rates were cut by 50 basis points in one move was at the height of the financial crisis in 2008,” CBRE said, noting the markets are pricing an additional 50 basis points in interest-rate cuts before year-end.

The CBRE Marketflash report said Powell specifically cited challenges for the travel industry and industries with global supply chains but noted the extent of impact remains uncertain at the moment.

Commercial real estate fundamentals entered the current situation in a very strong position, CBRE noted. “Moreover, labor markets are very tight, and companies likely will maintain their employment levels through the crisis,” the report said. “Nevertheless, property markets will reflect the broader economy, which is expected to see a short-term slowdown.”

If the coronavirus’s spread is brief, its real estate impact will lessen as the weather warms, allowing for stronger growth in the second half of the year, CBRE said. In the meantime, capital markets transactions will likely slow in the short term, though property values should be resilient. And new leasing commitments could be delayed as occupiers defer decisions on new space until later in the year.

“With the 10-year Treasury trading at historically low levels–below 1 percent for the first time–low interest rates will be a positive factor for property markets,” CBRE said.