As of September 21, the Federal Reserve has raised its overnight rate by 75 basis points, which now positions the rate in the 3% to 3.25% range. Headline inflation is reported at 8.6%, and core inflation is reported at 6.3% with “no signs that inflation is going to come down, yet.” What does this mean for investors in Commercial Real Estate?
Supply Chain Issues
Slowdowns in the global supply chain have had a direct impact on the inflation rates of the U.S. For example, the war in Ukraine is slowing down the oil industry, and China’s “Zero COVID” policy is slowing down the manufacturing and shipping of goods through the ports.
On The Homefront
In the United States, there are currently 5.2 million more job openings than there are people actively seeking employment. There is also $23 Trillion sitting in consumers’ savings accounts, which is up $5 Trillion from pre-pandemic levels. The U.S. tracks shipping and logistics at 0.5% less than pre-pandemic levels while core retail sales are up 20%. In short, consumption demand is up, and supply cannot keep up with the demand. The Federal Reserve’s response to decrease demand is to raise interest rates, with their target overnight rate reaching the 4.4% range by December 2022.
“In a nutshell, the Fed’s basically suggesting the economny may need to go into a recession to get inflation under control.”
John Chang / Marchus & Millichap
How The Rate Increase Has Affected Real Estate Markets
In the single-family market, home sales have fallen 28% since January 2021 with a steep decrease in the last 6 months. In the commercial market, the seller/buyer disconnect is heavily prevalent. “Sellers tend to be slow to adapt to a cooling market. Many continue to shoot for top dollar when they sell and often end up chasing market prices down. But buyers are completely changing their underwriting assumptions. At the beginning of the year, investors could get financing in the 3% to 5% range”, says John Chang. “Today, rates are in the 5% to 7% range and they’re likely moving higher.”
What Should Investors Do?
Motivated sellers are suggested to recalibrate their pricing to reflect the market. On the other hand, buyers are suggested to take this as an opportunity to position themselves for the next 3 to 5 years. With the stock market down 20% this year, commercial real estate may be one of the best options to invest in while the Federal Reserve tackles inflation.
By Marcus & Millichap