Last week’s Jackson Hole Economic Policy Symposium is one of those events that starts with economists and interest rate nerds glued to their screens.
But it quickly becomes front-page news that every investor hears about.
This year was no different. Fed Chair Jerome Powell’s speech seemed to telegraph a cut to the federal funds rate next month, and market traders have now priced in a 99% probability of a September cut.
The possibility of lower rates has real estate investors excited, and understandably so.
But I’m concerned that a lot of investors are setting themselves up for disappointment, at least in the short term.
Once They Start, They Don’t Stop
Although Powell’s comments were dovish, he was very careful to avoid giving any hint that a full-on rate reduction program is in the works. Adding to this, Atlanta Fed President Raphael Bostic came out saying that if the Fed does cut, they’ll only cut once.
But there's basically zero precedent for that.
SMBC did research showing that the Fed almost never cuts just one time and walks away. Once they start cutting, we typically see at least 75 basis points over the next few meetings – whether the economy is in a recession or not.
So if they cut in September (which seems likely), I’d bet we see at least another quarter-point cut or two before year-end. And if you look at the probabilities in the graph above, the market is betting that too.
Great News, Right?
Most real estate investors hear “rate cuts” and immediately think: Great! Lower rates immediately mean more deals, higher asset values, and better returns.
But here’s the problem: the federal funds rate (the only interest rate directly controlled by the Fed) isn’t what drives commercial real estate – CRE debt is tied to the 10-year Treasury.
And those two don’t always dance together.
For example, the Fed cut 25 basis points last September. What happened to the 10-year Treasury? It actually rose over the following weeks and still hasn’t come back down to that previous low.
Why the lack of correlation? A smattering of reasons including inflation expectations, bond market weirdness, and other macro events. But the reasons don't really matter for this discussion.
What matters is understanding that Fed cuts don’t automatically mean cheaper commercial real estate debt.
There’s Still Reason for Optimism
Fed cuts do set up a better environment for commercial lending rates to eventually come down. It's not guaranteed or immediate, but it improves the odds.
And when those rates drop: both sellers and sidelined capital come off the bench, and deal flow picks up. We might even see the beginning of a new commercial real estate cycle.
So what does all this actually mean for you as a passive investor?
Focus on What You Can Control
Here’s my main takeaway: we’re looking at asymmetric risk/reward right now.
Barring total economic meltdown, there’s significantly more upside than downside in most commercial real estate. If lending rates do drop over the next year, deals getting done today will benefit. If they don’t, good deals that cash flow at today’s rates will keep cash flowing.
Don’t get hung up on Fed decisions you can’t control. Focus on finding great sponsors, doing proper due diligence, and investing in quality deals with solid fundamentals.
The opportunities are there today for investors ready to act on them.