Those are the lyrics from a famous Barry Manilow song from the 70’s. And they are very welcomed words here in late 2024 for those of us working in commercial real estate seeing interest rates declining consistently for the first time in over 2 years. Yes, the desert landscape created by the Fed with their hiking rates more and faster than anytime in the past 40 years is starting to change. The future looks much brighter for 2025!
The primary takeaway from the Federal Reserve move this month coupled with their ‘Dot plot’ graph looking forward is that not only have rates peaked, but are likely to come down significantly over the next 12-18 months. At this point, the neutral rate is close to 3%, meaning we have another 1.75% or more to go before they are done lowering. That will just take time. Given the overall labor market and consumer confidence/demand, there is little to no risk of these reductions spurring inflation.
What does that mean for us in CRE? Basically it’s good news going forward and the spigots we suspect will begin opening over the next quarter and really begin to move in early 2025. Cap rates have risen enough that combined with interest rates generally below 6% now, potential purchases pencil much better. That will get the buying side moving. When you put that together with owners whose loans are beginning now to convert over to variable rates (many adjusting to over 8%), it becomes a good time to sell/exchange as well. Those represent the two primary ingredients to get the engine running again! Over the past few months, we’ve worked on a couple of transactions yielding 75-80% loan leverage. No, that is not a typo. The delta between interest and cap rates is now again large enough to allow for that leverage.
Where do we go from here? Essentially we dust off the old playbooks, get out the uniforms, and head back out onto the field to get ready to play. Regardless of the challenges over the past two years, the fundamentals remain of cash flow and debt service. Now with potential sale properties and interest rates making more sense, it’s time for buyers to start looking and potential sellers to work with brokers on pricing. Right now is a great time for both sides while the markets remain relatively quiet and overall activity is low. Once it picks up steam, that opportunity will likely pass and quickly.
In the meantime, with lenders coming back to the market, interest rates coming down, and some transactions moving into the pipeline, we stand ready as always to help with financing!
