What does the Federal Reserve's decision to cut its benchmark rate mean for you?
Despite recognizing “moderate” economic growth and a “strong” labor market, the Federal Reserve lowered its benchmark rate by 0.25 percent on Wednesday while suggesting more cuts could be on their way. The rate cut was the first since Dec. 16, 2008. Does it signal an opportunity for real estate investors or is it a move that will simply delay an unavoidable economic downturn?
Our attorneys offer their insight and recommendations:
McDonald Hopkins President
This change in Fed policy presents business owners with both good news and bad news. With a rate reduction, the lower cost of capital makes expansion and growth less expensive. If, however, the rate cut does not forestall the economic slowdown that seems to be the Fed’s concern, additional debt for expansion or growth could be a long-term burden for businesses.
West Palm Beach Managing Member | Board of Directors | Executive Committee
This is an unprecedented rate reduction at a time when the fundamental economics for real estate ownership are strong. It provides a unique opportunity for owners to refinance loans that are either nearing maturity or that may have higher rates. If anyone has been on the fence, this rate reduction will certainly give impetus to refinance. Also, for buyers, depending on the amount of any rate cut, the rate reduction could provide an opportunity to re-underwrite potential acquisitions or development opportunities that were marginal or even infeasible at current market rates.
Chicago Managing Member | Board of Directors | Executive Committee
In pulling the interest rate lever, policymakers obviously perceive risks to global and economic activity. The question is whether this action effectively mitigates those risks. It is also possible that the rate cut will just delay an inevitable downturn and, in delaying, exacerbate future economic pain. In light of current corporate debt levels, this issue should not be overlooked.
Co-chair Real Estate Practice Group
The Fed’s concern about a global-led slowdown while the US economy remains solid has provided a boon to commercial real estate investors. Commercial real estate investors can now enjoy lower variable rate commercial mortgage loans and their income producing property is now worth more when compared to lower yielding investments. Commercial owners should consider refinancing in light of the Fed’s rate cut.
Jeff Van Winkle
Member | Chicago
Dealmakers for cross border transactions continue to seek appropriate value for transaction currencies. If the decrease in the fed rate is perceived as appropriately impacting the value of the US dollar, then the change may prompt forward action on current transactions. At the same time, this fed rate change will also be interpreted as one more signal to the international business community that the US economy is slowing and needs encouragement. Businesses with a business strategy well-based on fundamental business values will simply consider the rate change as just one more variable, but not the most significant variable.
Member | Detroit and Chicago
Over the past few years, construction and labor costs have grown significantly, which, compounded with soaring land values in major markets like Chicago, have made it difficult for commercial developers to underwrite new development projects. The Fed’s decision to lower interest rates by a quarter of a point could spark developers who were on the fence to take on larger or more risky deals with financing costs going down, particularly smaller and mid-size developers looking to grow. However, many believe that the industry has already accounted for the rate cut and so we will not see any meaningful impact on commercial developers (or lenders), who might also be worried that the cuts are a sign of the overall economic growth slowing.