Powell Teases Strategy Review as Rate Cuts Loom

The Fed’s new strategy could be the key to maintaining a strong economy, especially as Powell aims for that elusive “soft landing.”

Jordan B. & Han-Gwon Lung
August 26, 2024

Good morning. Fed Chair Jerome Powell hinted that high interest rates might soon end, with rate cuts likely due to a weakening job market. The big question remains: Can they avoid triggering a recession?

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Central Banks

Powell Teases Strategy Review as Rate Cuts Loom

Fed Chair Jerome Powell announced that rate cuts are on the way and a major strategy review is coming as inflation nears 2% and unemployment hits 4.3%.

Hawkish dove: Powell’s speech marks a sharp turn from his previous stance. Remember Jackson Hole two years ago when he called inflation “transitory”? That was a head fake. Now, with unemployment climbing to its highest in nearly three years—Powell’s focus has shifted from fighting inflation to preserving jobs.

Fannie Mae

Zoom in: The recent jump in unemployment, driven by workforce expansion and slower hiring rather than layoffs, added pressure on the Fed to act. Powell acknowledged the labor market’s softening and signaled the Fed’s readiness to cut rates in September, stating, “We do not seek or welcome further cooling.”

Fannie Mae

Housing market: Mortgage rates fell to a 15-month low after Powell’s remarks, providing some hope for the sluggish housing market. Mike Fratantoni, chief economist at the MBA, predicts rates could drop to around 6% over the next year, potentially easing pressure on the real estate market.

Fannie Mae

What’s next? The Fed’s next meeting on September 18 is expected to bring a rate cut, with the size—either 0.25% or 0.5%—hinging on upcoming data, particularly the August jobs report. But this raises questions about the pace of easing and where rates will eventually stabilize.

➥ THE TAKEAWAY

No more free money: Borrowing costs may not return to past ultra-low levels, with factors like AI, globalization shifts, and supply shocks potentially driving rates higher. Policymakers might need to adjust their approach, recognizing that future inflation could be less predictable. One thing’s clear: The Fed’s framework will need to be flexible enough to handle a range of economic scenarios.

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✍️ Editor’s Picks

Rent collusion: The Justice Department sued RealPage, alleging its rent-setting algorithm illegally enables landlords to coordinate price increases, stifling competition and driving up rents.
Shifting market: Large property sales outpaced smaller deals in early 2024, reversing a trend from 2023 driven by fewer distressed sales and a focus on larger institutional transactions.
Caught in contempt: Starwood Capital is pursuing contempt charges against Joel Schreiber for evading $88M in loan judgments.
Zoning overhaul: Berkeley, California, plans to overturn its historic single-family zoning to address housing shortages and encourage multifamily development.
New leadership: Wesley LePatner will become CEO of Blackstone’s BREIT in January 2024, succeeding Frank Cohen as the firm navigates a choppy real estate market.
On the rise: US new-home sales soared 10.6% in July to the highest level since May 2023, driven by lower mortgage rates and increased builder incentives.

🏘️ MULTIFAMILY

Pulling back: Multifamily permits in California fell 27% in early 2024, hitting a 12-year low, while single-family permits rose 13% as builders shifted focus.
Plano Deal: TruAmerica Multifamily acquired Sheridan Park at Spring Creek Apartments in Plano, TX, for $50.3M, expanding its Texas portfolio in six key markets.
Making history: A $75 million loan will fund NYC’s largest office-to-residential conversion at the former Pfizer headquarters.
Steady growth: In June, single-family rental prices rose 2.9% year-over-year, maintaining pre-pandemic growth rates. The Washington, DC metro led gains at 6.5%.
Limited supply: BlackRock acquired a 218-unit senior housing community in Wayland for $98M.

🏭 Industrial

Big tech tenants: Data-center landlords, like Equinix, are finally gaining pricing power over big tech tenants due to soaring demand driven by AI initiatives and limited space availability.
Tempe redevelopment: Evergreen Devco will replace a Tempe office building with two industrial buildings and a storage yard.
West Palm expansion: Twenty Lake Holdings acquired five warehouses in West Palm Beach for $15M.
Staying strong: CanTex Capital secured a refi for the 893,738-square-foot Sylvania Industrial Park in Fort Worth, Texas.

🏬 RETAIL

Retail by regions: In 2024 Q2, Moody’s says the Northeast and Southwest regions topped retail revenue growth, while Cleveland excelled and Albuquerque saw the steepest decline.
Make it pencil: JBL Asset Management purchased the nearly fully leased Ridge Plaza in Davie from Continental Realty for $22.3M.
Nashville hub: David Creed plans a 25,000-square-foot food and beverage retail hub in Nashville’s Wedgewood-Houston.

🏢 OFFICE

Downgraded: Moody’s downgraded CMBS tied to offices owned by a Pimco affiliate to the lowest junk rating due to tenant losses and rising interest-payment shortfall risks.
Office cuts: NYC Mayor Eric Adams has directed agencies to reduce the city’s 550-property office footprint, potentially leading to significant space consolidation and cost savings.
Heard on the street: Douglas Durst sees a strong recovery in NYC’s high-end office market while multifamily conversions gain traction. There is growing interest in urban and suburban projects.

🏨 HOSPITALITY

Deal of the day: Nuveen Green Capital provided a $190M C-PACE loan to refinance Virgin Hotels Las Vegas, marking the largest C-PACE financing in Nevada and the second all-time.

📈 CHART OF THE DAY

Retail Leasing Hits New High Despite Economic Challenges

Retail leasing activity surged in the second quarter, with retailers signing leases for over 52 million square feet—marking a 10% increase from the two-year average for the same period and the highest level of leasing since Q1 2022.