What The Recent Fed Announcement Means For CRE

Terrydale Capital

May 6, 2024 5 Min read

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Over the last week, rates started to dip after the Fed Meeting. While the Fed did not announce a rate cut, they did announce a large change in their policy. Starting in June, the Fed will slow the pace of bond sales from its current $7.5 trillion balance sheet from $60 billion per month to $25 billion per month. This comes after the balance sheet doubled to $9 trillion from the pre-pandemic size, which led to the Fed allowing the expiration of some of its holdings of Treasury and mortgage-backed bonds. Here, we will detail the implications for commercial real estate investors and how some assets may feel the positive effects. 

What Exactly Is Happening?

When the Fed buys debt securities, it consequently drives up the prices. This, in turn, lowers the yield. When the Fed purchases Treasury securities, the reduction in yield subsequently produces debt interest savings for the government. While the Fed cut the federal funds rate to near zero during the 2008 financial crisis and the economy wasn’t able to sufficiently bolster debt markets to optimal function post-pandemic, the Fed is now enacting quantitative easing/tightening (QE/QT). The Fed is now electing to not reinvest a portion or all of the principal repaid when the securities mature, also known as runoff. This is also coupled with the reduction of the Fed’s bond sales. 

Implications For Commercial Real Estate

In many cases, commercial real estate is tied to the Treasury Index, especially in terms of financing. For instance, 10-year fixed loan rates are typically tied to the 10-Year Treasury Bill. As the Fed cuts its bond sales by 41%, this means that Treasury Bond pricing will subsequently drop. In lieu of this, we can expect Treasury rates to begin to slide as well. 

At market close on Friday, May 3rd, we saw updates of between 30 to 40 bps drops in certain multifamily stabilized programs. This is due to an anticipatory drop in Treasury Bill yields along with a drop in the spread. With spreads also tapering in , this is anticipated to bring down the all-in rates even further. 

While there wasn’t an overt announcement of rate drops, this is still good news for commercial real estate investors. This can allow for some relief to those waiting to refinance out of short-term bridge loans or for the plethora of investors facing maturations of their fixed rate loans. Additionally, this could have a positive impact on sales prices in the market, allowing buyers to find their way into the market that they couldn’t prior. 

In Conclusion

Despite the lack of overt rate cuts or talk of any in the near future, the Fed’s reduction of bond sales is still anticipated to have positive ramifications for the market moving forward. This will allow many investors currently playing the waiting game to edge into their refinance or acquisition much easier than before. When you need the right team behind you for your commercial real estate financing needs, Terrydale Capital stands at the ready. Contact us today.

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