On March 22, 2023, JLL published the article “Move Fast and Break Things.” In that piece, JLL Chief Economist Ryan Severino argued that the Fed’s aggressive hiking helped contribute to recent—and much publicized—banking issues. While the individual banks in question also contributed to the issue, the article said that the situation is concerning. Though the government’s lending program should put the breaks on a worse economic situation, “that does not mean it will avoid more bank runs,” the article said.

Then the Federal Reserve announced a 25-basis-point hike of the Effective Federal Funds Rate, “expressing caution about the recent banking crisis and indicating that hikes are nearing an end,” according to CNBC. In response, Severino told Connect CRE that the recent hike of 25 bps demonstrates that the Fed analyzed recent banking issues before issuing this recent rate hike.

“This means a softening stance, with the Fed changing the tone of its language and keeping the terminal Fed Funds rate near 5% and pushing higher,” he said. The reasons are because recent events will likely slow inflation—which was already decelerating. “For the Fed, the risk has started to shift from tightening too little to tightening too much,” Severino noted.

Meanwhile, the JLL article said that slowing inflation is one reason for a different Fed stance. Another is that retail sales are holding their own. Though February 2023 sales took somewhat of a beating, “overall sales for both January and December got revised upward,” the article said. This, in turn, should support positive GDP growth for Q1 2023.

So how does all of this impact commercial real estate? The article didn’t sugarcoat much, noting that “a tightening of lending standards would slow economic growth, generally unhelpful to commercial real estate.” Additionally, while rate hikes, overall, might slow, “increased uncertainty and concern regarding the banking system are not ideal ways to accomplish that.”

But there are some positives, one of which is declining interest rates, which could help the home sales market. And if banking troubles and slowing inflation “were to bring about a faster end of the tightening cycle, this would be an unambiguous positive for CRE,” the article noted.