THE FED… AND MOB IMPLICATIONS

After more than a year of steadily increasing interest rates, the Federal Reserve (the Fed) announced another slight rate increase in July. Will we see more interest rate increases later this year?

Marcus & Millichap predicts that the Fed will probably hold off on more rate increases for the following reasons:
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• Inflation is down: The current inflation rate depends on how you measure it, but a variety of metrics all show that inflation is falling.

• Student loans: After more than three years on pause, student loans will resume accruing interest in September. Resuming payments on $1.8 trillion of student debt will lower the consumption of millions of Americans, further reducing inflation.

• Low personal savings: Personal savings increased sharply during the pandemic. When the world reopened for business, heavy spending helped fuel the recent spike in inflation. Americans’ savings are now back in line with pre-pandemic levels and the end of the post-pandemic spending boom should reduce inflation.

• Slower growth: Recent data shows that job creation is positive, but slowing. The economy is still healthy and growing, but the trend suggests lower inflation.

• Time lag on policy changes: It is very hard to know if previous interest rate increases have already played out, or if their effects are yet to be fully felt. Given that inflation already appears to be cooling, the Fed is likely to be cautious about further tightening.

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I agree with this analysis and I see it as very positive for the commercial real estate (CRE) market.

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When rates are rising, uncertainty over where rates will end up makes investment planning difficult. Lenders may charge even higher rates to get ahead of further rate hikes by the Fed. Buyers find it hard to value assets and secure debt capital.

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We’ve seen this playing out over the last year with wider price spreads and fewer transactions across the market.

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As interest rates stabilize, good things start to happen. Inventory that property owners have held back from the market starts looking for buyers. Lenders who were previously afraid of taking on too much risk in a rising interest rate environment start to loosen up. We expect to see more lenders in the market with easier underwriting conditions and more buyers able to line up financing.

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Stable interest rates make things easier. With more buyers and sellers, market liquidity and price discovery will improve. This is good for the whole market.

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At Alliance, we’re already finding great deals. We can win in any interest rate environment, and we’re keeping a close eye on further developments at the Fed. And as rates level off, we expect to see even more new buying opportunities.

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As always, Alliance is ready to pounce on great deals and bring home great returns for our investors.

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