The Federal Reserve’s interest rate cuts could help turn the tide in commercial real estate. But investors should tread carefully when they step into the market. The half-point reduction by central bank policymakers last month “signals the last start of the worst CRE decline since the Global Financial Crisis,” Wells Fargo said in a Sept. 25 note. “Lower interest rates aren’t a magic bullet, but less restrictive monetary policy is laying the groundwork for a commercial real estate recovery,” senior economist Charlie Dougherty wrote. “The decrease in long-term interest rates seems to reduce the upward pressure on the cap rate and reduce the decline in property valuations. Meanwhile, increased expectations for a soft view of the economic landing will give the green light for the capital to move to the margins,” he added. There are a few bumps in the road. On Monday, the 10-year Treasury yield rose above 4% for the first time since August, following a better-than-expected jobs report on Friday. Bond yields move inversely to prices. One basis point equals 0.01%. Fed funds futures suggest an 84% chance of a rate cut at the Fed’s next meeting in November, when no one expects another half-point cut, according to the CME FedWatch Tool. Of course, there are no barriers ahead of the market, especially for office space, Dougherty said. “That said, the reduced interest rates should prevent the spread of distress and ease the obstacles in the way,” he said. Lower refi rates for Corporate borrowers, who have outbid mortgage offers through higher-rate environments, will get relief and eventually be able to refinance at lower rates, said Douglas Gimple, senior portfolio specialist at Diamond Hill. The company’s Short Duration Securitized Bond Fund (DHEIX) had about 25% of its portfolio in non-agency commercial mortgage-backed securities, as of September 30. ,” said Gimple. “It’s not going to happen overnight, because we know that when the Fed acts – whether it’s higher or lower – it takes some time to work its way through the system.” He thinks that investors can find value now by focusing on the process “If you can find a diamond in the rough from a price point of view, you can find some great opportunities,” he said. “You just have to be careful what you buy.” Investors need to know what the manager is buying, or if they’re investing themselves, know what they’re buying, he said high-end hotels – or one borrower, which can be a hotel chain with multiple locations. The latter are short-term deals that float rates and are usually done by companies to upgrade properties, such as adding energy-efficient swimming pools or air conditioning to apartment complexes, he said. . Each investment will also always depend on the deal, Gimple said. For example, they are not buying office space in Los Angeles or New York, but may be looking at suburban deals. They will see offices that are class A, which are usually the most modern, and have an occupancy rate of 95% with a variety of occupants. In hotels or lodgings, they are looking at “trophy” properties in areas like Miami or Hawaii. “It’s not about the hotel, it’s about the location,” Gimple said. They also look at single family and industrial rentals, as well as retail for certain majors. Any CMBS holdings should be part of a diversified fixed income portfolio that includes credit and Treasurys, he said. “It depends on the risk appetite that will determine what allocation to look at,” Gimple said. “You’re remiss as an investor if you just avoid all parts of the market because you read the headlines. There’s still opportunity.”
Food cuts can turn the tide for commercial real estate. Where to find opportunities
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