The Federal Reserve’s decision to slash interest rates by 50 basis points - its first cut in four years – has been welcomed by real estate leaders in Europe keen that the US institution should now “stay the course”.
Jim Gott, head of asset surveillance at global loan service provider Mount Street, described the rate cut as “well overdue” but said that the Fed “should be applauded for being bold”. He added:
“For the commercial real estate market, it’s a real positive. The perfect storm of high interest rates following on the back of Covid, coupled with the new work from home paradigm, has put huge pressure on the sector, which has resulted in negative sentiment and limited investment appetite.
“This cut will start to free up the markets, allowing better price discovery and, ultimately, increased deal flow.”
The Fed announced at its 18 September meeting that it would cut interest rates by 0.50 percent after US inflation finally dipped below 3 percent in July and appeared to be heading towards the 2 percent target. This was a deeper cut than some market watchers had expected, with a few pundits predicting a more cautious 0.25 percent reduction.
Noted Gott: “US CPI is now close to the Fed target of 2% and US unemployment has also crept higher to just over 4%. As a result, we are now in that interesting period for market sentiment where the bears shout recession and the bulls shout growth.”
The rate cut is expected to relieve some pressure on real estate firms facing a record slate of debt refinancings, while also stimulating consumer confidence and supporting occupier markets.
Need to stay aggressive
However, Nigel Green, CEO of financial advisory and asset management firm deVere Group, said that the Fed “must not now lose its nerve” and needed to remain aggressive.
He noted: “This larger-than-expected cut is an encouraging step in the right direction. But to truly realise the long-term benefits of today’s decision, the Fed must continue to show resolve. It needs to keep up the pace with further rate cuts, with another 50 basis points in December and more into 2025.
He cautioned that a failure to maintain momentum could undo the positive signals sent out by the interest rate decision and even leave markets more vulnerable. “A failure to follow through on further cuts would likely undermine confidence and signal that the Fed lacks the commitment needed to fully stabilise the economy,” Green added, noting: “A single rate cut will not be enough”.
Green called for another 50 basis points cut in December and “more into 2025” which he said would be critical to “reinforcing market confidence, driving economic growth, and ensuring the stability of both the US and global economy.”
Already on Wednesday, stock market gains in the US were wiped out as the Dow Jones, S&P 500 and Nasdaq hit highs and then tumbled to finish lower than the day’s start, credited to confusion about whether the rate cut implied a weakening economy. Yet UK stocks and the pound both bounced upwards on Thursday morning after the Fed’s decision.
Global impacts
However, some market watchers suggested that the Fed cut was not particularly “data driven” but was rather an attempt to satisfy market demands. "What we did not expect was a 50-basis-point cut today," said economist Thomas Simons at Jefferies. "We had thought that the Fed sent a clear message before the pre-meeting blackout period that they were going to start slow.
“We must have misheard the message because nothing in the data released during the blackout period suggested that the Fed needed to start with a bigger cut. That being said, the guidance does not suggest that we should expect a series of 50-basis-point rate cuts going forward."
Global inflation in the wake of pandemic stimulation packages and Russia’s invasion of Ukraine have seen central banks largely on the same page over the last two years, calling a rapid sequence of rate rises since spring 2022. The Fed, for example, hiked its benchmark interest rate 11 times between March 2022 and July 2023.
Divergence appeared among central banks earlier this year as Europe moved ahead with rate cuts as inflation started to weaken. In June, the European Central Bank (ECB) cut rates for the first time in five years, slashing its main rate from an all-time high of 4 percent to 3.75 percent. That followed a decision by Canada to reduce its rate.
Then, on 12 September, the ECB cut rates again to 3.50 percent, further bolstering the market. Dominique Moerenhout, CEO of EPRA, said that the latest decision indicated that “the European economy is in its recovery phase, which should see increased capital flows into European listed real estate in particular”.
He added: “Defining a new cycle for the real estate sector, the ECB’s reversing of a record string of rate hikes will give investors continued confidence to commit capital into new and existing assets.
“With that said, the ECB’s route to its 2% medium-term goal is still likely to be a bumpy one – for the remainder of this year and beyond. Whilst inflation is likely to remain above target significantly into 2025, the ECB’s strategic rate cuts signal that stronger economic growth is on its way following a stagnant 2023.”
The Bank of England also reduced policy rates in August to 5 percent from a 16-year high of 5.25 percent, its first rate cut in over four years. However, the institution is expected to keep rates on hold at 5 percent in its meeting today.
Yet the Fed cut could still benefit UK and Continental European real estate players as it signals a “landing zone” for global inflation, potentially impacting swap rates and the cost of debt.
Weakening commercial real estate values have been hampering borrowers' ability to refinance loans and increased the risk of potential distress across the industry. This has been negative for bondholders, banks, covered bonds and commercial mortgage-backed securities (CMBS), as well as corporate real estate issuers.
However, there is hope that an easing lending environment will bring new confidence to the market as it has a positive impact on valuations and therefore transactions.