This isn’t a guarantee of a recession, but one seems more likely to happen than not.
For those in commercial real estate worried about the immediate economic future, today brought a double dose of bad news.
First, in order of occurrence, the Atlanta Fed gross domestic product (GDP) tracker just indicated an update of estimated second quarter economic growth: 0%. Then came the moment many had been steeling themselves for. The Federal Open Market Committee of the Federal Reserve raised its benchmark interest rate by 75 basis points, the largest since 1994, according to multiple outlets, and a jump up from the 50 bp increase that the Fed had previously telegraphed.
As of 2:15 eastern, markets, while not joyous, are taking the changes in stride. The S&P 500, Dow, Nasdaq, and even the Russell 2000 are all up from yesterday. That may be because there were already expectations of the higher Fed hike and the GDP estimate news having come out earlier today. It might also be that investors are happy that the Fed is taking stronger action in an attempt to bring inflation under check. But there could be repercussions for CRE.
Both the events are significant. On June 9, the Atlanta Fed’s estimate had dropped from the previous 1.3% at the month’s opening to 0.9%. Hitting zero in the middle of June means plenty of time for an estimate to swing into the negative.
This isn’t a definitive sign of a recession. A couple of quarters of negative GDP growth are only a rough rule-of-thumb for a recession, not the final call made by the National Bureau of Economic Research. However, it’s not a good sign. As the Atlanta Fed wrote, “After recent releases from the US Bureau of Labor Statistics, the US Census Bureau, and the US Department of the Treasury’s Bureau of the Fiscal Service, the nowcasts of second quarter real personal consumption expenditures growth, second quarter real gross private domestic investment growth, and second-quarter real government spending growth decreased from 3.7 percent to 2.6 percent, -8.5 percent to -9.2 percent, and 1.3 percent to 0.9 percent, respectively.”
The Fed’s 75 basis point increase in interest is the largest jump since 1994, according to multiple outlets, and higher than the 50-basis point increase that had originally been expected.
Each of the events has a potential impact on CRE. The Fed’s rate increase will ultimately mean higher commercial loan interest rates. Interest rate caps have moved so high that they are killing many deals by making them unprofitable. Higher interest also means that refinancing deals that initially depended on cheap money could become a challenge.
“The increase in rates is likely to have a negative impact on asset prices, as potential buyers are expected to face higher borrowing costs, and lenders will likely be cutting down leverage so the property can cover high interest expenses,” Mitchell Rosen, managing director, head of real estate at Yieldstreet, tells GlobeSt.com. “However, as interest rates continue to increase, more and more people will look to put-off their home buying decisions which should result in higher occupancy and tighter rental markets within the multifamily sector of CRE.”
As for a recession, that’s bad news for companies and for consumer spending, which could mean more impact on retail and office properties, to say nothing of additional areas of impact from higher interest rates.