Trying to predict the direction and timing of interest rates and the Fed over the past two years has been challenging to say the least. And on more than one occasion I felt the end was in sight and the downward move was upon us. While I have clearly been wrong on those other occasions, even a stopped clock is right twice a day!
On Wednesday, the Fed finally began the ‘real’ downward’ easing with the first of what appears to be 3 rate cuts this year with more to follow next year. While not as soon as we would all have liked, better late than never. The warning signs for the Fed on employment are finally exceeding concerns over inflation which has clearly moderated over the past 3 years.
The major shift happened with the annual adjustment by the BLS of prior year’s job growth. In September 2024, that adjustment caught almost everyone off guard at over 800,000 – an adjustment never seen before. This year – believing 2024 was an aberration – the adjustment came in even higher at over 900,000. In both cases, monthly employment growth was overestimated by a staggering 70,000 jobs per month. In other words, the job market was not all rainbows and unicorns. Furthermore, the adjustments this year appear to have jobs growing at only 25-50,000/month. Wages are still increasing slightly faster than inflation. However, for the first time in over 4 years, openings are now LESS than the overall number unemployed. In a more worrying sign – from my perspective – continuing unemployment claims are now also at 4 year highs.
While these figures are definitely not catastrophic, they clearly point to softening and the Fed finally got the memo!
So where do we go from here?? Good question!
Interestingly, after the Fed cut and surprised many by inferring another two cuts this year, the 10-year treasury actually went up roughly 1/10th%. That simply shows that the treasury market remains somewhat tenuous on a day to day basis. However, the general trend continues down with the hopes that the 10-year treasury could be in the mid-3’s by spring of next year. Should that happen, most fixed rates on CRE loans will be in the mid or slightly higher 5’s. Couple that with the new state of higher cap rates and suddenly we have a solid basis for purchase growth.
I expect over the next several months as CD rates for investors continue to decline, those same investors will begin deploying that capital back out into the CRE market and sale volumes will increase – perhaps not dramatically, but steadily as we move through 2026. As I’ve mentioned before, we all need to hold on until then and recognize that the backside of this cycle is indeed finally in sight. As I said at the outset, even a stopped clock is right twice a day. I’m very hopeful that now is one of those times!
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