The Fed’s Delay and CRE
- Oct 07, 2015
For the past several months, the commercial real estate industry has been awaiting the decision that would impact not only its bottom line but also its momentum toward a stronger recovery. While labor markets have strengthened, downward pricing pressure from the decline in oil and commodities has kept inflation below the Federal Reserve’s target. In fact, the Fed took the path of least resistance in September and voted to keep interest rates at 0.25 percent — but for how long?
In speeches following the decision, Federal Reserve Chairwoman Janet Yellen has called for proactive steps in the coming months, while hinting at an increase before year’s end. She warned that continuing to keep rates this low could encourage “inappropriate risk-taking” that could negatively impact the strength of the financial markets.
An increase requires the economy to be in a position for maximum growth. To provide further insight into why the market is not quite there, Yellen also echoed Stanley Fischer’s thoughts from the Jackson Hole Summit in August. Fischer explained that unemployment is not what’s slowing inflation; the lagging inflation is rather a product of a drop in oil and commodity prices and a rise in the dollar. The strength of the dollar allows for cheaper imports but impedes exports. In its post-September meeting press release, the Fed confirmed that rates will increase “when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” according to the issued statement.
The 16-1 vote against raising rates in September was the first time since January that Fed members were not unanimous in their voting. The decision will be tabled until their next meeting, where projections show 13 policy makers seeing higher rates by year-end. Based on the forecast, we are likely to see only one increase in October or December, down from two in the previous forecast.
What does this mean for commercial real estate? The Fed’s decision brings stability and continuation of low interest rates for construction, bridge and floating-rate loans for now. Additionally, the pressure on bank earnings’ net interest margin should encourage financiers to increase real estate lending.