The Latest Rate Increase and What It Means For Investors

One observer of the commercial real estate market claims that the most recent rate increase by the Fed has increased the “expectations gap” between purchasers and sellers of commercial real estate.

According to a recent research video by Marcus & Millichap’s John Chang, “Sellers tend to be reluctant to respond to a cooling market.” Many sellers still aim for the highest possible price when they sell, which frequently leads to price chasing. However, purchasers are drastically altering their underwriting assumptions, which has led to a wider buyer-seller disconnect and a slowdown in commercial real estate activity.
Chang advises motivated sellers to adjust pricing to the market, and buyers to take advantage of the opportunity to focus on strategic acquisitions to position themselves for the next growth cycle.

According to Chang, commercial real estate may be one of the greatest investment possibilities as the Fed battles inflation and stirs up some economic volatility. “Any Fed-induced slump should be modest compared to the prior two recessions,” Chang says. Investors should start planning for the future now, namely where they want their portfolio to be in three to five years.
Chang claims that despite the fact that there are still no indicators of inflation decreasing, the Fed’s most recent 75 bps increase was “telegraphed and wasn’t any surprise.” The headline inflation rate was 8.2% as of a few weeks ago, whereas the core inflation rate was 6.3%.

According to Chang, the conflict in Ukraine has reduced the supply of food, natural gas, and oil. Manufacturing and shipping in China are still prohibited by the COVID zero-tolerance policy, and continued transportation issues have made it difficult for items to travel. He adds that the fact that there are 5.2 million more job vacancies than unemployed individuals and that unemployment is 3.7% shows “the strength of the US economy is on the other side of the equation.” For the past eight months, wage growth has exceeded 5%, and household savings have reached $23 trillion, a significant increase from pre-pandemic levels. Retail sales adjusted for inflation are 20% greater than they were prior to COVID.

Chang notes that the infrastructure for manufacturing, transportation, and logistics “just cannot keep up with consumption.” To address this, the Fed will attempt to reduce demand and bring it back into balance with supply by raising interest rates. Unfortunately, this will be painful. To put it briefly, the Fed is basically saying that in order to bring inflation under control, the economy might need to enter a recession.