What The Fed's Recent Hikes Mean For CRE Investors
The recent 50-basis point increase in the overnight rate—which took the federal funds rate to 0.75%—has been on the lips of economists and industry watchers for the last week. That, coupled with the Fed’s initial steps toward quantitative tightening, has investors treading lightly.
But the moves toward quantitative tightening were “well-telegraphed,” according to Marcus & Millichap’s John Chang, who said “it seems that Wall Street has already baked them into the market.” With that said, the Federal Reserve is making a concerted effort to get inflation back under control, and the consumer price index was 8.5% at last reading, with a new number set to be released May 11.
“Basically, inflation is at its highest level in 40 years, and the Fed is trying to use monetary policy to rein it in,” Chang says. “The idea is that by increasing interest rates borrowing will be reduced and spending will slow down. That would shrink the demand side pressure that’s pushing prices up.”
In response to some critics opining that the Fed is behind the curve, Chang maintains there were some challenges that the Fed didn’t initially anticipate.
Chief among them? The ever-present supply chain problems plaguing virtually all facets of the global economy.
“The supply chain problems haven’t gone away,” Chang says. “They’re in better shape today than they were six months ago, but China is still the number-one producer of consumer products, and they keep going through massive COVID lockdowns.”
Shanghai is also the world’s largest port, moving one and a half times as much container volume that the ports of Los Angeles and Long Beach combined – and the entire city has also been under COVID lockdowns since March 28, “so basically nothing is leaving the Shanghai port,” Chang says.
Underlying inflation drivers like the price of oil, construction materials, housing and wages have all also been rising, further fueling the Fed’s predicament. And though the cost of borrowing is going up, “the US is flush with cash,” Chang says, with household savings exceeding household debt for the first time in three decades. That means “it may take awhile before the brakes catch.
“If the inflation curve doesn’t flatten, investors should expect additional significant rate increases coming from the Fed’s meeting on June 15 and July 27. At this point a 75 basis point increase this summer is not off the table.”
For CRE investors, that means looking to stash capital in inflation resistant property types like multifamily, self-storage, and hotels. Chang also says investors should plan for rising interest rates by locking in long-term debt as soon as possible, but notes that strong household balance sheets will remain a tailwind for spending supporting properties in the retail and hospitality sector.
And as for pricing, “some buyers are pushing back due to rising interest rates,” Chang notes. “But demand drivers for housing and space in most commercial property types still have a strong outlook, and new supply risk has been mitigated by the pandemic. That means the fundamentals outlook remains strong, and rent growth will be strong for most property types in most areas. In addition, capital liquidity is still elevated, so there are many buyers and we’re still in a competitive bid climate.”
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