Latest Rate Cut Only Partial Answer, But Every Little Bit Helps: Marcus & Millichap’s Hughes

Last week’s move by the Federal Reserve to trim a benchmark interest rate may have only a modest impact on its own. But any steps that can ease the credit squeeze or stabilize investor confidence can only help in the long run, says William Hughes, senior vice president & managing director of Marcus & Millichap Capital Corp., the capital markets affiliate of Marcus & Millichap Real Estate Investment Services Inc. “I think the Fed is trying to play every card it possibly can,” Hughes told CPN. Lowering the federal funds rate from 1.5 percent to 1 percent is partly intended to give Main Street a boost after several months of perceived focus on Wall Street, Hughes said. Dropping the cost of borrowing between banks could ultimately help consumers by lowering costs of credit cards and other borrowing. That, in turn, could improve the flow of cash to consumers. That may only have a modest impact at this point, since the Fed has lowered its funds rate starting in 2007. Hughes noted. And the rate cut may barely make a blip on the commercial real estate radar; among other reasons, much of the floating-rate debt in the industry is based on LIBOR. How effective the federal government’s larger strategy will be, of course, is still uncertain. A few trends actually offer some encouragement for real estate capital markets, Hughes suggested. Rate reductions for LIBOR, short-term commercial paper and inter-bank transactions are all signals of improved liquidity. Life insurance companies, commercial banks, Fannie Mae and Freddie Mac are all lending, though on more conservative terms and at lower volume than they were a year ago.As for the continuing concerns, paralysis still grips the long-term commercial paper market, Hughes noted. And the federal government’s demand for financing to rescue the capital markets and cover the next budget deficit could drive up capital costs. Meanwhile, investors continue to stay on the sidelines, waiting to see how the policies of the newly-elected administration influence the capital markets.