- Wells Fargo’s senior economist, Charles Dougherty, believes a potential Federal Reserve rate cut could revive CRE activity.
- Dougherty anticipates a 50 bps rate cut, with more cuts by the end of the year, which could boost investor confidence.
- Sidelined capital could return to the market, especially in asset classes like multifamily and industrial properties, expected to recover faster.
- Lending trends show some positive signs, but delinquencies, especially for larger banks, remain a concern.
As the Federal Reserve prepares to cut interest rates for the first time in over four years, the commercial real estate market is poised for a potential revival, as reported in Bisnow.
According to Wells Fargo Senior Economist Charles Dougherty, even a modest rate cut could have a significant positive impact, boosting confidence in a sector that has struggled for some time with cautious lenders.
Impact of Rate Cuts
Federal Reserve Chairman Jerome Powell recently signaled that a rate cut is imminent, with many economists expecting at least a 25 bps reduction.
Dougherty is more optimistic, predicting a potential 50 bps cut, followed by further reductions in November and December. He emphasized that the psychological impact of the cuts will be the key to a rebound, even if immediate changes in lending are modest.
“The anticipation of a cut is already greasing wheels,” Dougherty said, adding that it signals the end of the tight monetary policy that has stifled the CRE market.
By The Numbers
Despite the anticipated rate cuts, lenders will likely remain cautious in the short term. Dougherty notes that the September cut will likely help “around the margins,” but capital markets will still be prudent.
However, he believes the overall sentiment shift will encourage investors to return to the market. “There’s been a lot of capital on the sidelines, and it doesn’t want to stay there forever,” he said.
Certain asset classes, such as multifamily and industrial properties, are expected to benefit the most from rate cuts. As market conditions improve, these classes could potentially see lending opportunities.
Challenges, Delinquencies
While some green shoots are emerging, including a 27% rise in commercial-backed mortgage originations, the lending landscape remains challenging.
Delinquency rates for CRE loans have risen, particularly among large banks. The rate for loans overdue by 90 days surged from less than 1% in 2022 to 3% in early 2023. Smaller banks have been more resilient, seeing lower delinquency rates.
Despite its optimistic forecast, Wells Fargo (WFC) has divested itself from the commercial mortgage-backed securities market, selling off billions in loans and closing its entire CMBS division, reflecting ongoing pressure in the banking sector.
Looking Ahead
Dougherty remains hopeful that the cumulative impact of rate cuts will lead to more favorable conditions for CRE. He predicts that as the Federal Reserve shifts its monetary policy from hawkish to dovish, economic growth will pick up, leading to increased demand.
“Once we move away from this difficult environment, we’ll see more robust activity in the CRE market,” Dougherty said, signaling a potential rebound on the horizon as markets adjust to the new reality of lower rates and revived confidence.
