As of 10am December the 4th, the market is projecting a 74% chance of an interest rate cut at the next Federal Open Market Committee (FOMC) meeting. The meeting is set to take place on December the 18th and it would place the effective fed funds rate at 4.25% – 4.50%. As a real estate investor, understanding these probabilities is crucial for making informed decisions and predicting market movements. An excellent tool to find the information regarding upcoming market projections is The Chicago Mercantile Exchange (CME) FedWatch tool (Link).
The CME FedWatch tool utilizes futures contracts on the federal funds rate to estimate the likelihood of interest rate changes. By monitoring the prices of these contracts, market participants can gauge market expectations for future rate movements. The tool provides a visual representation of these probabilities, giving analysts and traders a clear view of market sentiment.
As one might expect, the information is very dynamic as it follows trades throughout the day and can change multiple times intraday. Moves are usually small when no breaking news or data comes out for the market to absorb, but it is very important to check back in any time a CPI report, or jobs report, or other data reports that the FOMC relies on to make its interest rate policy decisions. Additionally, drastic changes can take place after an FOMC meeting if the Fed makes any adjustments to their projections of policy in their “dot plot”.
Following the December meeting, the market is currently only projecting a 17.8% chance of a cut in January, but is more bullish of a cut in March with current projections at 46.7%.
While this information is extremely important and will have a direct impact on short-term floating rates, real estate investors need to keep in mind that the primary benchmark for what moves the needle for commercial real estate is the 10-year treasury rate. The 10-year has the largest impact on long-term fixed interest rates for commercial real estate loans, desired returns by equity investors, and in turn, cap rates. With all of the information regarding market predictions for the fed funds rate, the forward curve, which is the future estimate for the 10-year treasury, remains on a slightly increasing slope for the foreseeable future.
This means that while the expectation is certainly for the Fed to continue to cut their benchmark rates, the rate that most impacts CRE borrowing and values are expected to be mostly unchanged to slightly increasing in the face of Fed cuts. While a cut in short-term rates has the ability to spur some activity for construction and bridge loans that utilize short-term floating rates, the market will continue to face familiar challenges of the past two years of increased cap rates and long-term borrowing costs.
Partner with us to navigate the complexities of commercial real estate. Get in touch today to explore how our expertise can unlock the full potential of your real estate investments.