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The Fed Signals a Potential Rate Hike Pause. But What Does This Mean?

The Federal Reserve surprised no one by increasing the Effective Federal Funds Rate (EFFR) on May 3, 2023. While many news outlets point out that the Fed is indicating a potential pause on additional future rate hikes, experts tell Connect CRE that future messaging from the Fed will be important when it comes to commercial real estate lending.

Past Moves: Rapid Rate Hikes

Brook Scardina

The experts agreed that the rapid Fed rate hike history has generated – and continues to generate – deep uncertainties in the marketplace. Despite the rapid rate increases, “inflation remains persistently high,” said Brook Scardina, managing partner, capital markets and investments with Oak Real Estate Partners. These higher rates, in tandem with the systemic risk involved with regional banks “are expected to result in a further tightening of financial credit conditions,” Scardina said.

Larry Jacobson agreed with the assessment, noting that banks, in general, will continue to be conservative in underwriting real estate deals over the next several months. However, “availability to capital will be a function of asset class,” said Jacobson, who is president of Jacobson Equities.

The Future Messaging: A Potential Pause?

Adam Weissburg

But the more important issue is whether the potential pause mentioned by news outlets will become a reality. “Until then, lenders will be reluctant to do much,” said Adam Weissburg, partner and co-chair of the finance team at Cox Castle  & Nicholson. “They need clarity on rate increases to make appropriate underwriting decisions.”

Going one step further, Federal Reserve messaging will likely determine both lender and investor responses. “Whether the Fed increases rates and what language they employ when providing future guidance for potential rate hikes or cuts later this year or next year could have a big impact on investor sentiment and CRE transaction volume in 2023,” said William James, co-founding principal of Bandon Capital Advisors.  

Larry Jacobson

What might an actual pause generate? It could likely mean “positive effects on lending, as well as investor sentiment,” said Noel Liston, managing broker, Core Industrial Realty.

Impacts of a Rate Hike Pause

Certainly more stable rates will help commercial real estate investors get a better handle on the cost of capital. Constantly escalating rate hikes make underwriting difficult. But it would be a mistake to assume that pausing the rate hike increases will lead to immediate certainties in the capital arena.

Noel Liston

“While a pause in rate increases would alleviate the present angst and uncertainty in the lending and investment markets, ultimately, we still need to see where long-term capital trends are headed so owners and operators of real estate can effectively navigate the marketplace,” Liston pointed out.

Additionally, “until the interest peak is achieved, lenders will be reluctant to do anything. Once achieved, they will still be cautious, relative to new originations,” Liston said.

The Move to Alternative Capital Sources

William James

But none of the above means that real estate capital is going away. It will come from other sources. Scardina anticipates that that current situation will favor private real estate lenders, who will “benefit from more deal flow, higher interest rates and less competition.”

And James added that life company lenders are still in the game. “Most of the life company lenders we work with are still targeting record years for volume,” he said. “They have ample capital to deploy for commercial real estate, especially for moderately leveraged deals with strong sponsorship.”

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Inside The Story

Jacobson Equities' Larry JacobsonBandon Capital's William JamesCore Industrial Realty's Noel ListonOak Real Estate Partners' Brook ScardinaCox Castle's Adam Weissburg

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