The Federal Reserve's recent decisions and the overall economic landscape have significant implications for the real estate market. In this blog post, we'll explore the Fed's rate hike hiatus, its rationale, and its potential effects on commercial real estate.
Fed Opts for a Rate Hike Hiatus
On September 20, the Federal Open Market Committee (FOMC) announced that there would be no change in the federal funds rate, while the institution would continue to reduce securities holdings. This decision maintains the current lower bound of 5.25 percent, which was first set in July. Notably, this marks the second meeting in 2023 during which the Fed chose to forgo a rate increase.
The FOMC's decision-making was significantly influenced by labor market dynamics. While labor demand still exceeds supply, job openings have declined as recruitment has tapered. Chairman Powell reiterated the Fed's open-ended, data-dependent stance at the meeting. This contrasts the language used during June's pause, which explicitly referred to that decision as a skip, foreshadowing the increase in July. Although FOMC projections imply another hike is possible, it is not an official goal. As of late September, Wall Street estimates the chance of a hold through year-end at over 60 percent.
Multiple Risk Factors at Play
Several risk factors could impact the Fed's decision-making. The September meeting occurred ahead of a possible government shutdown, which added to economic instability. It also had the potential to inhibit the collection of key unemployment and inflation statistics. Chairman Powell affirmed that the Fed would proceed with its duties despite a shutdown, but a lack of data would complicate the policymaking process. Ongoing labor disputes in various sectors, including the Writers Guild of America, Screen Actors Guild, and United Auto Workers, could have a disruptive effect. An expiring contract at Kaiser Permanente may lead to additional protracted labor negotiations.
Overall Economic Health and Real Estate
Despite potential challenges, the overall economic health continues to support the commercial real estate market. The robust labor market has outperformed previous expectations, resulting in consistent consumer spending growth. This, in turn, has bolstered fundamentals across multiple property segments. For instance, retail properties have maintained a 4.6 percent nationwide vacancy rate since late last year, a multi-decade low. Similarly, industrial and multifamily vacancy rates remain below their respective long-term averages on a national scale, despite an ongoing cooldown in both sectors.
Steadier Interest Rate Policy Eases Transactions
The recent hiatus in rate hikes could translate into a more stable interest rate environment. This stability should facilitate transaction velocity moving forward, providing investors with more confidence and predictability.
Tightening Process and the Long-Term Outlook
Between the June and September meetings, the FOMC raised its projected median federal funds rate for year-end 2024 to 5.1 percent. While not a guarantee, this projection implies that rates could remain elevated for longer than previously expected. An extended period of elevated rates may delay the long-term improvement of transaction velocity, but it's an important step toward stability. Current projections suggest that reaching the peak of the current hiking cycle is within striking distance.
As we navigate these economic shifts and the Fed's policy decisions, it's essential for real estate professionals to stay informed and adapt to the evolving landscape. The dynamics between the Federal Reserve and the real estate market will continue to play a significant role in shaping the industry in the coming months.