There was one important aspect of the Fed’s meeting last week which has gotten very little attention – and which I suspect will have a greater impact on long-term CRE rates going forward: the end of quantitative tightening.
For the past 3+ years and as part of the Fed’s overall monetary policy, in addition to increasing the basic Fed Funds and Discount Rates, they also began shedding treasuries and mortgage backed securities off their balance sheet. They began buying those back in 2020 to the tune of trillions of dollars to help absorb all the aid being dished out by the federal government. The market couldn’t buy that amount of debt, but the Fed could which kept interest rates artificially (and likely dangerously) low. When they began the rate race to the sky, they also began selling those bonds – essentially dumping them on the market at a rate not seen before at nearly $100 billion a month. When you consider the government was still borrowing at a rate of $140 billion a month, you can see the supply problem that created. And as we all know from our Econ classes in school, the greater the supply, the lower the price. And in terms of treasuries, that means a higher interest rate. The Fed was a competitor with the federal government on top of Fannie Mae and Freddie Mac backed mortgage securities. They began to slow the pace in late 2024 and finally at this meeting after over 3 years, they announced an end to that policy effective December 1.
I realize a lot of that is ‘in the weeds’ stuff, but it’s important. Reducing the supply every month going forward will naturally increase prices for bonds and mortgage backed securities. That means interest rates will subside. The only question now is how much.
Over the past couple of weeks, we are still seeing some up and down movement in the long-term treasury market. However, it does seem to have come into a pretty narrow range of 25bp up or down. Given the past 3+ years, that’s stability! And stability promotes confidence on the part of investors – in particular those investing in commercial real estate. Given the end of the Fed policy in December – late as it may be! – we should start seeing the impacts pretty quickly by January. Does that mean 4% long-term borrowing rates as some claim, I wouldn’t go nearly that far. Does it mean the prospect of interest rates on CRE back close to 5% by the end of Spring – hopefully. If we hit that mark, expect a big resurgence in CRE activity with Cap rates having risen enough and interest rates coming down enough to make the delta between the two attractive for buyers and by extension sellers.
There really is finally a light at the end of this long tunnel. And depending on other market factors, it could well be a very bright light. That’s the hope!
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