The Fed Rate Cut 2024: Too Little Too Late?

September 20, 2024 Don Catalano Don Catalano

Well, it happened. The much anticipated interest rate cut has finally hit the American people, even though many of us were doubtful it would ever come.

 

On September 18th, Jerome Powell introduced the Federal Reserve's decision to cut rates by a half percentage point, which was greeted as welcome news. The historic cut was the first one of its kind in four years.

 

The half-point cut aims to restore price stability and lower borrowing costs, a necessity amid high inflation and a relatively softening labor market.

 

However, with the economy still adjusting from the pandemic's aftershocks, some experts believe the impact on wage growth, mortgage rates, and commercial landlords might not be enough to stave off further financial strain.

 

The choice by the central bank to lower interest rates by half a point is a significant move, yet many wonder: is it too little, too late for sectors like commercial real estate, where landlords are struggling under mounting debt? Read on to find out. In this article, you'll learn:

  • About the FED's half point rate cut
  • When following rate cuts will be
  • Whether the rate cut has come too late for commercial landlords

To help navigate these turbulent times, tenants can download a free copy of
"Surviving the Office Apocalypse"
—a comprehensive guide that offers practical insights on how to thrive in this shifting environment. From negotiating leases to understanding market trends, this resource is designed to help tenants stay ahead during this office real estate collapse.

 

Surviving The Office Apocalypse

 

Half a Percentage Point Cut

Fed Chair Jerome Powell stated in a news conference, the central bank's decision to lower interest rates is driven by a commitment to achieving maximum employment and restoring price balance, recalibrating the market from two-decade high inflation rate of 9% in 2022.

 

The half-point cut from the central bank was more aggressive than anticipated. Rumors of a quarter point cut were circling prior to the press conference, to serve as political optics as we inch closer to the election.

 

jerome powell

 

While Fed Chair Jerome Powell refrained from making any sweeping statements about the timing or magnitude of future cuts, he did refer to this move as part of a broader cutting cycle, signaling it won’t be a one-off adjustment.

 

According to quarterly projections released Wednesday, the central bank's median forecasts anticipate another 50 basis points of cuts before the end of the year, followed by an additional 100 basis points in 2025.

 

This would bring the federal funds rate target down to a range of 4.25% to 4.5% by year’s end, and to 3% to 3.25% by the following year, reflecting the Fed’s ongoing efforts to manage economic stability.

 

"Traders now see a 61.1% chance that the central bank will lower interest rates by 25 basis points at its November meeting, as per the CME Group's FedWatch tool."

-Reuters

 

This slight ease on price pressures and borrowing rates was viewed by some as a healthy pace. While the half point cut to the steep national interest rate is only the beginning, it encouraged Americans enough to boost the Dow Jones industrial average. 

 

"Wall Street's main indexes jumped at the open on Thursday, with the S&P 500 notching an intraday record high after the Federal Reserve kicked off its easing cycle with half-a-percentage point reduction and forecast more cuts were on the horizon." 

-Reuters

 

However, the question remains: with high prices still lingering and interest rate hikes from the past year having left deep scars, will a half point cut do enough? And if unemployment continues to trend upward, could it sabotage further cuts? 

 

Federal Reserve Watching the Job Market

The Federal Reserve's rate cut came as eyes have been turning to the labor market. One of the Fed’s core responsibilities is to monitor the unemployment rate, and though the labor market remains relatively stable, the recent uptick in unemployment has been a red flag. 

 

"A soft landing is still in play; that's still the default expectation. However, there's still clearly some concern that the labor market is going from a period of softness to weakness."

-Reuters

 

While inflation has been cooling, leading to a prolonged pause in rate cuts, the Fed’s action comes as the economy seems to be reaching a more balanced state.

 

However, the key factor that could disrupt this fragile balance is a sharp rise in unemployment. With the unemployment rate creeping up, concerns are growing that the country could be headed toward a more dangerous economic scenario: stagflation—a combination of stagnant growth and high inflation.

 

Slowed hiring and job market fluctuations raise questions about the Fed's decision. Lower rates are typically linked to more job gains, as employers’ benefit from cheaper borrowing costs, potentially fueling more hiring. However, with the labor market cooling and hiring slowing down, the effects of this rate cut could go either way.

 

www.ioptimizerealty.comhubfsmarket success

 

The decision of the central bank to cut rates is seen by some as a preemptive measure to bolster the economy, while others worry it may have unintended consequences if unemployment continues to rise.

 

What's Half a Point to a Failing Landlord?

The recent half-point rate cut has brought some relief to the market, but the landscape remains challenging for many landlords.

 

Most purchased their properties several years ago when mortgage rates were much lower, with interest-only mortgages locked in around 3%. Fast forward to 2024, where interest rates were double, sitting above 7% for the greater portion of the year.

 

Such an increase in interest rates levied an unsustainable recalibration for many, especially those already struggling with the reality that their mortgage payments ballooned to levels that were unimaginable when they initially signed their loans.

 

cre recession red flag

 

Complicating matters, approximately 80% of corporate loans set to mature in 2023 were extended into 2024. These loans weren’t refinanced last year, raising questions about whether they’ll be pushed into 2025 with the Federal Reserve promising more cuts on the horizon.

 

However, refinancing at still-elevated rates doesn't make financial sense for banks, especially with landlords already under severe strain.

 

Office landlords are feeling the brunt of this crisis. With occupancy rates around 50% and vacancy rates exceeding 20%, their net operating income has plummeted.

 

This drastic drop makes banks very reluctant to even entertain refinancing discussions. Regardless of the decision by the federal reserve to cut rates, it doesn't change the fact that the properties no longer meet the financial criteria banks require, leading to demands for more equity.

 

Banks have changed their LTV requirements, demanding more equity from the landlords. Where before, they might have been willing to lend on an LTV ratio of 70% / 30%, or perhaps even 80% / 20%, now are apt to require 60% / 40% or even 50% / 50%. 

 

And unlike residential, commercial property loans are based on the NOI (net operating income) which has dropped substantially for office and in some cases multifamily. The LTV has dropped, the banks are not wiling to take on the same level of exposure. 

 

Given that many of these loans are non-recourse, landlords can walk away without additional financial penalties.

 

Landlords are faced with the choice of injecting millions more in equity into underperforming properties. Many are opting to hand the keys back to the bank, triggering widespread defaults. 

 

A high-profile example is Brookfield defaulting on $1 billion in loans, and while Blackstone’s massive $924 billion portfolio can absorb such a loss, the broader financial system may not be as insulated. As defaults pile up, central banks could be left to absorb substantial losses, potentially mirroring the fallout of the 2008 financial crisis. If these losses accumulate, the taxpayer could once again be on the hook to bail out the banks.

While the FED's decision to instill a half-point rate cut offers a glimmer of hope, it’s unlikely to solve the deep-rooted issues quickly.

 

The office market will likely remain turbulent for the foreseeable future, and without further relief, landlords are likely to continue facing severe financial pressure.

 

navigating default landlord

 

Takeaways for Tenants

The Federal Reserve's decision to lower rates by half a percentage point may provide some short-term relief, but the effects remain uncertain, especially in sectors hit hardest by high borrowing costs, like commercial real estate.

 

Fed officials are aiming to stabilize the economy by addressing unemployment and inflation, but the reality is that this cut, while significant, might be too little, too late for struggling landlords and businesses.

 

The Fed's decision will have widespread consequences—affecting everyone from other central banks to average Americans. While the rate cut signals the start of a broader easing cycle, its ability to stave off financial stress in sectors like office real estate remains in question. Without further, more aggressive cuts or alternative relief, the office market will likely continue to experience turbulence, and landlords may be forced to make difficult decisions in the months ahead.

 

In the end, the Federal Reserve's rate cut is a step toward economic balance, but the deep-rooted issues in the job market and commercial real estate will require more than just a modest reduction to fully recover.

 

What we’re witnessing is symptomatic of a larger crisis—a looming office apocalypse. With rising vacancy rates, defaults on the rise, and landlords unable to meet their financial obligations, the commercial real estate landscape is undergoing unprecedented changes. In this environment, tenants will need to be strategic to protect their interests.

 

To help navigate these turbulent times, tenants can download a free copy of "Surviving the Office Apocalypse"—a comprehensive guide that offers practical insights on how to thrive in this shifting environment. From negotiating leases to understanding market trends, this resource is designed to help tenants stay ahead during this office real estate collapse.

 

Surviving The Office Apocalypse

 

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