When is the FED Lowering Interest Rates in 2024?

In this article you'll learn: 

• When a probable rate cut will come from the Fed
• How any rate cut is likely coming too late 
• Why office landlords are still in turmoil 
• How this crisis rivals the 2008 market crash 

The probability of the Fed cutting interest rates is extremely high as we enter the second half of 2024. Unfortunately, the meager cut we're most likely in for, will not bring us close to the benchmark rate of a 2% inflation.

While a potential quarter-point cut could alleviate some pressure on outstanding balances and reduce interest costs for consumers and businesses, it may not be enough to significantly stimulate economic growth or counter the current rise in prices. And any interest rate cut by the federal reserve definitely comes too little too late for commercial landlords.

This market is symptomatic of an all-out office apocalypse, triggered by plummeting demand in the wake of the pandemic. And with all the talk about defaulting commercial landlords, no one seems to be discussing the major companies caught in leases with those defaulting landlords. This is an unprecedented environment for corporate tenants, so they can download their survival guide today.

Has the Federal Reserve Put Off a Recession?

We may be in for a September rate cut. But as the Fed officials continue to recalibrate the market from two-decade high inflation rate of 9% in 2022, we are likely to see rates come down only a quarter of a percentage point.

The Fed’s decision is influenced by a range of economic factors, including inflation, employment, and economic growth. Fed officials consider the risks to both inflation and the unemployment rate when making decisions.

The Fed’s goal is to strike a delicate balance between keeping rates high enough to quell inflation and avoiding a recession. The central bank’s decision is also influenced by global economic trends and the actions of other major central banks.

But the red flags are still out there when we consider the current risk of recession. The economy is slowing faster than anticipated. 

The federal reserve chair, Jerome Powell’s assessment of the transitory recession was apt and has likely avoided further crash. But even with the possibility of a quarter-point rate cut in September or November, the impact may be minimal—a placebo at best.

Now the question is, will the Fed continue to be too late? And at the same time, does their data-dependent approach slow them down even further? 

A slight reduction in September will hardly offset the massive increase in costs, especially for commercial landlords who have been experiencing their own recession. Any talk of relief by lower mortgage rates is coming far too late, as many are grappling with the reality that their mortgage payments have ballooned to levels that were unimaginable when they initially signed their loans.

For office landlords, they're already in their own bubble of recession. And the bubble may be about to pop.

Borrowing Costs for Landlords

Most landlords purchased their properties several years ago when mortgage rates were much lower. Back then, locking in interest-only mortgages at around 3% was a common practice. However, as we move through 2024, the landscape has shifted dramatically. The interest rate has more than doubled, now sitting over 7%.

For many, this has resulted in a completely unsustainable recalibration, potentially becoming the final nail in the coffin for struggling landlords.

Adding to the complexity, about 80% of corporate loans that were set to mature in 2023 got extended into 2024. These loans weren't refinanced then, raising the question of whether they will be in 2024 or 2025.

Unfortunately, refinancing these loans doesn’t pencil out for banks. Read more: Extend and Pretend a $1.3 Trillion CMBS Loan Crisis Doesn't Exist

Office landlords, in particular, are already grappling with severe financial strain. Many are facing 50% occupancy rates and vacancy rates exceeding 20%. With such diminished net operating income, banks are reluctant to even entertain refinancing discussions. The drastic drop in income means that the properties no longer meet the financial criteria banks are looking for, and they’re demanding more equity.

Most of these loans are non-recourse, meaning landlords can walk away without additional financial penalties. As a result, rather than infuse millions more into their properties, many landlords might choose to hand the keys back to the bank. And this is happening at rapid rates. Landlords are defaulting all over the country, leaving the lenders to absorb the loss.

A high-profile example of this is Brookfield defaulting on $1 billion in loans. Given that Blackstone's portfolio is $924 billion so it’s no loss to them, but it may become a big problem for taxpayers. 

Because the national debt is already at historic levels, if banks are forced to absorb substantial losses from defaults by landlords, the ramifications could be severe. Such a scenario could mirror the 2008 financial crisis, where a wave of defaults and financial instability led to widespread economic turmoil. In this case, taxpayers might end up footing the bill for the fallout, as banks and financial institutions grapple with the fallout from these non-recourse defaults. Read: Are Bank Bailouts on The Horion?

So, a quarter-point rate cut may be on the horizon, but it’s unlikely to have a swift or substantial effect. The issue is too deep-rooted, and the problems landlords face won’t be resolved quickly enough. The office market will continue to be bumpy, and without significant and immediate relief, landlords are likely to remain in a dire situation.

2008 or 2024?

It doesn't take an economist or a historian to recognize that this situation rings eerily familiar. Actions from the Federal Reserve are looking to avoid a crash tantamount to 2008's housing crisis.

The real estate market was a central factor in the crisis, with rampant speculation, subprime mortgages, and a high rate of mortgage defaults. The collapse of housing prices led to widespread foreclosures and a subsequent banking crisis.

Similar vulnerabilities are emerging in the commercial real estate sector now. Many landlords and corporations, who secured loans under favorable conditions years ago, as discussed, are now struggling as rates have risen sharply. The pressure is further compounded by high vacancy rates and diminished property values.

Currently, national debt has surged to over $34 trillion, reflecting years of increased government spending and economic stimulus. Similarly, high levels of corporate debt and mortgages, particularly in the commercial real estate sector, echo the pre-crisis conditions.

In 2008, the interconnectedness of financial institutions and the scale of the debt led to systemic risk, where the failure of one institution had cascading effects across the entire financial system. Now, the high national debt and potential losses from defaults could create systemic risks. If banks are forced to absorb significant losses from defaults, the financial strain could impact the broader economy, reminiscent of the 2008 crisis.

Takeaways for Tenants

The Federal Reserve’s decision to cut interest rates only once in 2024 is a sign that the central bank is taking a cautious approach to monetary policy. The decision is influenced by a range of economic factors, including inflation, employment, and economic growth. Consumers and businesses can expect higher borrowing costs for the foreseeable future but may also see lower interest rates on savings accounts and other deposit products.

Some experts argue that the Fed should cut interest rates more aggressively to stimulate economic growth. Others believe that the Fed’s decision is appropriate, given the risks of inflation and the need to maintain financial stability.

But at the end of the day, the elevated mortgage rates are spelling a lot of trouble that is not isolated to the real estate market. If the Fed lowers rates further, the situation may be alleviated, but the coming months will decide how quick a decline in rates will affect the economy.

The current environment is symptomatic of a post-apocalyptic office market, where traditional strategies may no longer suffice.

Right now, the focus is on the wave of landlord defaults, but an equally pressing issue is the impact on major companies locked into leases with these failing landlords. When landlords default, tenants are often left in a precarious position, facing uncertainty about their lease agreements and the stability of their office space.

For many businesses, this situation can create a ripple effect of disruption. Companies might find themselves needing to navigate sudden relocations, renegotiate leases, or even deal with potential interruptions in their operations. Understanding the implications and preparing for these challenges is crucial for maintaining business continuity and minimizing risks in an increasingly volatile real estate market.

To better adapt and prepare, consider exploring "Surviving the Office Apocalypse: Strategies for Commercial Tenants in a Changing Market." This resource provides insights and practical advice for managing these challenging times and making informed decisions about your office space and business future.