Powell Hints at Possible Rate Cut Amid Risks of Higher-for-Longer

In testimony before the U.S. Senate Banking Committee Tuesday, Fed Chair Powell told the committee that a federal funds rate cut might be coming soon.

Powell Hints at Possible Rate Cut Amid Risks of Higher-for-Longer

In testimony before the U.S. Senate Banking Committee Tuesday, Fed Chair Powell told the committee that a federal funds rate cut might be coming soon.

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INFLATION NATION

Powell Hints at Possible Rate Cut Amid Risks of Higher-for-Longer

In testimony before the U.S. Senate Banking Committee Tuesday, Fed Chair Powell told the committee that a federal funds rate cut might be coming soon.

State of the market: Since the July meeting of the Federal Open Market Committee, the Fed has kept the key interest rate between 5.25% and 5.5%. Powell reiterated the Fed's target of 2% inflation, noting that early 2024 data did not inspire confidence that this goal was within reach. However, he highlighted recent improvements in inflation data, suggesting some progress toward the target. Powell also described the jobs market as "strong, but not overheated."

What about CRE? During his testimony before the Senate Banking Committee, Powell highlighted the enduring nature of commercial real estate risks, advising banks to honestly assess their exposure and ensure they have adequate capital, liquidity, and risk management systems in place. “It is a risk that has been with us and will be with us for some time, probably for years,” he stated.

Stress test: The Fed's most recent stress tests show large banks can manage CRE risks, while most small banks are similarly equipped. However, the top 25 largest banks are experiencing more loan delinquencies. Loans for non-owner-occupied properties held by banks with over $100 billion in assets have over 4.4% delinquency rates in Q1, compared to less than 1% for smaller banks and owner-occupied loans, per S&P Global Market Intelligence.

Risks of higher for longer: Powell acknowledged the risks of prolonged high rates, stating that maintaining elevated inflation is not the only concern. He warned that reducing policy restraint too late or too little could significantly weaken economic activity and employment. He also said that a weakening labor market is just as much a risk to the economy as high inflation.

➥ THE TAKEAWAY

Looking ahead: Following Powell's comments, investors maintained a nearly 70% probability of a Fed rate cut in September, according to Reuters. Brian Jacobsen, chief economist at Annex Wealth Management, said that Powell seems to be preparing for a rate cut, as the Fed views delaying such action as risky.

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✍️ Editor’s Picks

  • Not so elite anymore: NYC’s historic Ivy League social clubs, such as Harvard and Princeton Clubs, are losing members to more modern alternatives like Soho Club, leading to closures.

  • Distressed opportunities: Oaktree's Howard Marks is eyeing distressed CRE and private equity opportunities, thanks to $199B in US corporate debt.

  • Overwatch: The Biden administration proposed expanding scrutiny on any foreign real estate near US military bases, adding 50+ sites for review.

  • Sprawling success: Homebuilders in South Florida are expanding outside Miami-Dade, with luxury residential developer GL Homes recently buying land for 1,325 homes.

  • Ugly charts: National CRE foreclosures are surging, with Uniform Commercial Code (UCC) foreclosures drastically rising, and auction volumes doubling since 2019.

🏘️ MULTIFAMILY

  • Shiny new apple: NYC multifamily sales surged in Q2, hitting $2.6B, or 3x Q1's volume, driven by legislative changes that are boosting investor confidence.

  • Mid-year outlook: David Saxe and Brian Milovich, founders of Calvera Partners, discuss distress in the multifamily market, valuation trends, fundraising, and 2024's hot and cold markets.

  • Striking gold: Ryco Capital bought three Manhattan East Village mixed-use properties for $29M, reflecting the city’s ever-strong rental market.

  • Bank loan purge: Banc of California (BANC) is selling $2B business-purpose loans after its merger with PacWest to boost profits amid Basel III changes.

  • Storage revolution: Trojan Storage is planning a 193 KSF mixed-use complex with 25 apartments above offices and art studios, alongside a self-storage facility, in LA’s Sylmar neighborhood.

  • Downtown bargain: Iconiq Capital is looking to sell a 575-unit apartment portfolio in Downtown LA at a “significant discount to replacement cost,” despite a recently refreshed rent roll.

  • Every penny counts: Bay Area voters will decide on a $20B bond measure for affordable housing on November’s ballot. The bond would add $190 yearly per $1M in assessed home value.

  • Delinquent dilemma: Troubled CA Ventures is delinquent on $75M in CMBS loan for senior housing, facing legal troubles amidst low occupancy.

🏭 Industrial

  • Brooklyn bonanza: Thor Equities’ Joe Sitt is seeking $150M for a 312 KSF Red Hook warehouse that’s leased to Amazon (AMZN) for 13 years.

  • Cold, hard deals: The DFW industrial sector is thriving, with 17.9 MSF added YTD, $1.6B in sales, and the growing popularity of cold storage.

  • Land and expand: CapRock Partners acquired a 707 KSF industrial building in Sparks for $81.5M, marking their entry into northern Nevada.

  • Regional highlight: Lincoln Property Co. just sold a 146.64 KSF distribution center in Whitestown, IN for an undisclosed price as Indianapolis’s industrial vacancy rate inches up.

🏬 RETAIL

  • Bigger in Texas: Silver Star Properties just sold Richardson Heights, a 200 KSF shopping center in the DFW metroplex, for $40.5M, or $202 PSF.

  • What happens in Vegas: Aspen Real Estate purchased Renaissance III, a 226 KSF Vegas shopping center, for $24.7M, with a $7M renovation budget.

  • Faith meets creativity: Hobby Lobby will open its first Manhattan store (70.7 KSF) in Tribeca, part of the private chain’s rapid expansion.

🏢 OFFICE

  • Trading spaces: Tradeweb Markets, represented by JLL and Cushman & Wakefield, signed a 15-year lease for 75.83 KSF at 245 Park Avenue in Midtown Manhattan.

  • Ghost downtown: San Francisco’s office vacancy rate hits a record high of 34.5%, with average rents dropping to just $68.27 PSF.

  • Tax burden shuffle: Minnesota’s post-pandemic office sector challenges result in property tax burdens shifting to other commercial and residential properties.

🏨 HOSPITALITY

  • Private equity power: UK hotel dealmaking surged in 1H24 to over £3B, led by private equity interest, marking a nearly decade-high volume.

📈 CHART OF THE DAY

According to CoStar, DFW has enjoyed six consecutive months of rent gains (or every single month in 2024 so far), after six months of rent losses in 2H23. Interestingly, 2023 saw almost the exact same pattern play out. Meanwhile, annual rent growth remains relatively flat.

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