Fed’s Bold 50-Point Rate Cut Raises Questions About What Comes Next

Powell is determined to stick the landing, but the path forward is murky. Future cuts depend on incoming data, leaving the market to speculate whether more half-point cuts are on the horizon.

Han-Gwon Lung & Jordan B.
September 19, 2024

Together with

Good morning. Fed Chair Jerome Powell led an aggressive 50-basis-point rate cut, signaling his intent to avoid a recession, but it also opened the door to difficult questions about future rate moves.

Today’s issue is sponsored by Agrippa — a broker-free, AI-powered platform that streamlines direct connections between CRE sponsors, developers, and capital providers.

🎙️ New Episode: On this episode of No Cap by CRE Daily, Alex and Jack sit down with Michael Santora, CEO of Logic. They discuss his robotics platform, which automates supply chains and optimizes warehousing.

Market Snapshot

S&P 500

GSPC

5,618.26

Pct Chg:
-0.29%

FTSE NAREIT

FNER

843.27

Pct Chg:
-0.70%

10Y Treasury

TNX

3.704%

Pct Chg:
+0.017

SOFR

1-month

5.34%

Pct Chg:
0.0%

*Data as of 9/17/2024 market close.

ECONOMIC AGENDA

Fed Slashes Rates by 50 Basis Points, Raising Optimism and Uncertainty

With a surprising 50-basis-point rate cut, the Fed has intensified efforts to guide the U.S. economy to a soft landing, but new questions arise about the path forward.

Where is the middle? Powell's latest cut brought the federal funds rate down to 4.75%–5%, but the Fed still can’t pinpoint where the so-called neutral rate—the rate that neither stimulates nor slows growth—lies. Pre-pandemic estimates placed it at 2.5%, but officials now believe it’s likely higher. Powell hinted the neutral rate "is probably significantly higher than it was," though the exact level remains elusive.

Future cuts: The pace of future cuts is also uncertain. Despite Wednesday's 50-basis-point reduction, Powell cautioned that it doesn’t set a precedent for November’s meeting. While some expected a smaller cut this time, the Fed's next move is far from clear, with labor market data and mixed economic signals creating uncertainty. Loretta Mester, former Cleveland Fed president, noted the difficult decision ahead: “Going into the next meeting, it’s going to be, again, ‘25 or 50?’”

Balancing act: The Fed faces a delicate balancing act. On one hand, dragging out rate cuts could lead to a labor market slowdown, forcing larger reductions later. On the other hand, moving too quickly risks inflation settling above the 2% target. Powell stressed that while the labor market shows some weakness, the Fed is closely monitoring the situation, stating, “The time to support the labor market is when it’s strong.”

Zoom in: For the CRE sector, the rate cut is a step in the right direction but not yet a cure-all. Industry insiders, like John Vavas from Polsinelli, caution that the size of the cut is not enough to immediately impact underwriting or deal-making. The focus now shifts to potential market stabilization and price discovery, which could lead to more transactions after two challenging years. CRE deal volume has dropped significantly, with transactions falling by 50% year-over-year in many markets.

➥ THE TAKEAWAY

Looking ahead: The Fed’s aggressive rate cut hints at more reductions ahead, potentially boosting a sluggish commercial real estate market. However, uncertainty looms as the industry navigates economic shifts. Powell is determined to stick the landing, but the path forward is murky, with future cuts hinging on incoming data and leaving the market to speculate whether more half-point cuts are on the horizon.

TOGETHER WITH AGRIPPA

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✍️ Editor’s Picks

Hopeful homes: AOC's proposed $30 billion bill aims to create a social housing authority to address the affordable housing crisis by developing resident-owned co-ops and subsidized homes.
REIT revolution: Fortress and Goldman Sachs are launching nontraded REITs targeting wealthy individuals to meet rising demand for commercial real estate loans as institutional lending slows.
Workout warriors: Troubled CRE loan workouts across the country surged in 2024 YTD, with $64.3B to $156.2B across 5,468 to 6,351 loans.
Real Estate Renaissance: Clelia Peters' Era Ventures launches an $88M fund to invest in proptech startups, bucking the trend of declining venture capital in the real estate sector.
Floodplain folly: Florida leads the nation, with nearly 400,000 new homes built in flood-prone areas since 2001, raising concerns about increased flood risk and property damage.

🏘️ MULTIFAMILY

Rent vs. Own: A new report by Zillow Home Loans shows that monthly mortgage payments are cheaper than rent in half of all major US metro areas.
Distressed deal: Reap Capital seizes another seller-distressed property in Plano, TX, at a 25% discount from its 2021 sale price and 50% of its replacement cost. (sponsored)
Student haven: UCLA bought a 62-apartment complex in Cheviot Hills for $39M, with 50 three-bedroom units planned for student housing.
Lower leasing: Nationwide, student housing pre-leasing fell slightly this year, with 92.8% of beds leased for Fall 2024, down from 94.4% last year.
Granny flats: Long Beach's Backyard Builders Program offers 0% interest loans up to $250K for homeowners to build ADUs, supporting affordable housing.
Renting for growth: Rise Properties Trust purchased a 74-unit Bellevue apartment complex at $30M, averaging $405K per unit, targeting significant growth potential.

🏭 Industrial

Storage renaissance: Developers Flatiron Equities and Mequity Companies plan to convert a Class C office building in NYC's Garment District into a 16-story self-storage facility with 1,500 units.
Industrial chic: MCB Real Estate bought Howell 1, a 368 KSF facility in NJ, for $69.9M and signed a 15-year lease with a third-party logistics company operating in CA and NJ.

🏬 RETAIL

Dollar store dilemma: Dollar General (DG) and Dollar Tree (DLTR) plan to open over 1.3K new locations despite declining sales and growing e-commerce challenges.
South Florida sell-off: Macy's (M) sold the Boynton Beach Mall store in South Florida for $15M and a Pembroke Pines furniture store for $13M.
Restaurant dreams fade: Comedian Kevin Hart's plant-based restaurant chain, Hart House, closed all four LA locations after a fairly short run.
Legal saga settled: After 4 years, Ben Ashkenazy and the Gindi family settled their tense legal battle involving unpaid calls and defamation accusations.

🏢 OFFICE

Urban revamp: CA law now mandates office-to-housing conversion approval in city centers, streamlining the conversion process and requiring at least 50% residential use.
Distressed purchase: FRI Investors is set to acquire a Chicago office tower at 70 West Madison for $100M, marking a 73% discount from its 2014 price, amid a challenging market for downtown landlords.

🏨 HOSPITALITY

Big Apple welcome: Gencom acquired a 587-key, 42-story luxury hotel near Central Park that boasts 4.5 KSF of dining and event spaces.
Heatwave getaways: Summer 2023 was record-breaking globally, but 2024 is set to be even hotter. Unsurprisingly, the extreme heat is altering tourist patterns across popular destinations.

A MESSAGE FROM HERNANDEZ CONSTRUCTION

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Specializing in Spec, Build-to-Suit, and Design-Build, we go beyond managing your project. Our commitment is delivering it safely, on time, and within budget—while focusing on your goals to achieve speed to market. Let’s build together.

*Please see the advertising disclosure at the bottom of this newsletter.

📈 CHART OF THE DAY

Real estate investors are celebrating the Fed’s 50 bps rate cut, but its full impact on commercial and multifamily cap rates is still unfolding, says Jay Parsons.

With apartment cap rates hovering in the mid-5% range nationally, and well-located Class A assets compressing into the 4% range, much of the rate cut was likely already priced in by recent buyers anticipating favorable conditions.