Federal Reserve interest rate cuts may help turn the tide for commercial real estate. However, investors need to tread carefully when entering the market. Wells Fargo said in a Sept. 25 report that the half-point rate cut announced last month by central bank policymakers “marks the beginning of the end of the worst CRE downturn since the global financial crisis.” “Lower interest rates are not a silver bullet, but accommodative monetary policy will lay the foundation for a commercial real estate recovery,” said senior economist Charlie Doherty. “Lower long-term interest rates appear to be easing upward pressure on cap rates and slowing the decline in real estate valuations,” he said. “Meanwhile, rising expectations for a soft economic landing may give capital the green light to sidetrack.” It seems like they are giving it.” Added. The road has some bumps. The 10-year Treasury yield rose above 4% on Monday for the first time since August, following Friday’s better-than-expected jobs report. Bond yields move inversely to prices. 1 basis point equals 0.01%. According to the CME FedWatch tool, federal funds futures trading suggests there is about an 84% chance of a 0.5 point rate cut at the Fed’s next November meeting, but expects another 0.5 point cut. There is no one who does. Of course, Doherty said there are plenty of obstacles ahead for the market, especially office space. “That said, lower interest rates should prevent further hardship and lower hurdles going forward.” Lower refinancing rates for borrowers Douglas Gimple, senior portfolio specialist at Diamond Hill, said companies that have extended mortgage contracts through the high-interest rate environment will now receive some relief and will eventually be able to refinance at lower rates. He said it would happen. His firm’s short-term securitized debt fund (DHEIX) had about 25% of its portfolio in non-agency commercial mortgage-backed securities as of Sept. 30. ” Gimple said. “We know that when the Fed takes action, whether it’s higher or lower, it takes time to percolate through the system, so it’s not going to happen overnight,” he told investors. believes that value can be found by focusing on bottom-up processes. “If you can find diamonds in the rough that are negative from a price point of view due to their association with commercial real estate, you can find very good opportunities,” he says. “You just have to be careful.” Know what you’re buying. Investors need to know what management is buying, or if they’re investing themselves, what they’re buying. need to be understood, he said. Gimple particularly favors single-asset, single-borrower CMBS and commercial mortgage debt. The former, as the name suggests, involves a single asset, such as a luxury hotel, or a single borrower, such as a hotel chain with multiple locations. The latter are short-term, variable-rate deals that companies typically sign up to upgrade real estate, such as installing pools or energy-efficient air conditioning in apartment complexes. Gimple said each investment is always transaction dependent. For example, he doesn’t plan to buy office space in Los Angeles or New York, but he might consider a deal in the suburbs. He focuses on Class A offices, the most modern, with 95% occupancy and diverse occupancy. Within hotels and accommodations, look for “trophy” properties in areas like Miami and Hawaii. “It’s not really a hotel issue, it’s a location issue,” Gimple said. He’s looking at some retail, as well as single-family rentals and industrial. He said any CMBS holdings should be just one part of a diversified fixed income portfolio that includes credit and Treasuries. “The type of allocation you should consider depends on your risk appetite,” Gimple said. “You would be remiss as an investor to avoid the market as a whole just because you read the headlines. There is still opportunity there.”
