The Federal Reserve finally cut rates for the first time in a few years and they went big with a 50 bps move. What are the ramifications? We asked.
NATIONAL REPORT - The Federal Reserve made an aggressive move on Wednesday,
reducing interest rates a half-point to a range of 4.75% to 5%, marking the first cut since March 2020 after holding its key interest rate at a 23-year high for 14 months. The Fed also indicated that it expects to make two
additional cuts this year and four next year.
CBRE wrote on Wednesday that it believes that the Fed will
reduce the federal funds rate by an additional 25 bps in both November and
December, followed by 125 bps in cuts next year. “We expect that the 10-year Treasury yield will
remain under 4% at year-end and be in the mid-3% range for most of 2025 as the
Fed eases monetary policy,” CBRE stated.
However, the Fed could pivot to faster cuts if the economy weakens and conversely slow rate cuts if the economy strengthens.
CBRE said the forthcoming rate cuts,
coupled with lower bond yields, will bolster commercial real estate investment
activity and asset values. CBRE forecasts a 5% increase in annual commercial real estate investment
activity this year, with further acceleration next year.
Will this move open the spigot for more hotel M&A and
development? Hotel Investment Today reached out to
industry thought leaders to get what appears to be their mixed reaction to the Fed's move.
Although rate cuts will provide some relief, commercial real estate markets will likely remain sluggish, as participants struggle to adjust to this new normal of higher rates.
Greg Friedman
Greg Freidman, managing principal, CEO, Peachtree
Group, Atlanta
“Even after the Fed’s delayed response, the federal funds rate will
eventually settle and remain around 3%. This represents a significant drop from
current levels, yet it is still substantially higher —three times the average
rate during the decade leading up to 2019. Although rate cuts will provide some
relief, commercial real estate markets will likely remain sluggish, as
participants struggle to adjust to this new normal of higher rates. The timing
and pace of these rate cuts will be critical in mitigating risks, but we still
anticipate an increase in defaults and foreclosures, driven by an unprecedented
wave of loan maturities amounting to trillions of dollars over the next several
years.”
Kevin Davis, Americas CEO, JLL Hotels & Hospitality, New York City
“I’m surprised to
the upside and believe this is a material first step in jump starting the
broader transactions market. We see this as the start of the next liquidity
cycle and a number of our largest clients are communicating that they are going
risk on.”
David Duncan, president, CEO, First Hospitality, Chicago
“In simple terms, the rate
cuts are intended to provide some steam to the economy, guard against higher
unemployment while hoping to avoid inflation. This is some of the
medicine that is needed on the operating side as we’re seeing slight pullback in
topline performance, especially from leisure travel (economic outlook/consumer
confidence) and an increase in speed to fill open positions (higher
unemployment / more jobseekers).
We see this as the start of the next liquidity cycle and a number of our largest clients are communicating that they are going risk on.
Kevin Davis
“So, I’d say the move was needed. On the
deal side, the rate cut will be helpful to create more liquidity in the deal
market over time. However, from what I can tell the majority or the 50
bps current rate cut, as well as the anticipated future cuts, are largely
priced in. So, the move hasn’t changed our view on deal flow projections
over next 6-9 months. It’ll still be a challenge but we’re looking
forward to the velocity picking up and we’ll continue to be very active
sourcing new opportunities.“
Glyn Aeppel, president, CEO, Glencove Capital, New York City
“This is good news for M&A, hotel development and acquisitions
as it will begin to reduce the cost of capital and stimulate more transaction
possibilities. Construction costs and acquisition pricing also need to
adjust but this will be a great stimulant.“
Krystal England, chief investment officer, TMGOC
Ventures, Charleston, South Carolina
“One of the things that also plays into this is there has been for the
last, let’s call it 18 months, a substantial bid-ask spread or gap in the
marketplace. With the interest rate environment that we're coming out of, and
the new interest rate environment that we're going into, there's also a lot of
sellers that have been on the sidelines for quite a while, and we're starting
to see some of them come to terms with the new [environment] and I would say,
with buyer expectations to the extent that those sellers need to transact.”
Cody Bradshaw, hotel investor, London
“50 bps will only put a dent in cap rates, which have widened 200-300 bps points in recent years. But it will give the market more confidence in the forward curve and interest rates stabilizing back down near historical long term averages of circa 3% by end of next year. That should facilitate more activity in the debt capital markets, which in turn will fuel increased transaction volumes.”
From what I can tell the majority or the 50 bps current rate cut, as well as the anticipated future cuts, are largely priced in. So, the move hasn’t changed our view on deal flow projections over next 6-9 months.
David Duncan
Adi Bhoopathy, managing principal, head of capital markets, Noble Investment Group, Atlanta
“The
Fed's move for a 50-basis-point cut instead of 25 is an indication that it’s
moving with conviction and willing to make decisions based on the data
available, said The initial cut won’t have an immediate impact as
it usually takes a quarter or two to settle in.
“All
of the prognostications are already looking at the forward curve with
meaningful rate cuts throughout the next year and a half. Lenders in
general are already taking a positive view, and folks who were sitting on the
sidelines are already picking up the phone and making proactive calls.
“In
terms of hotel deals, those on the sell side are looking positively at a
timeline that’s likely more near-term than previously anticipated, starting as
soon as the beginning of the new year. The start of the year is when
there should be meaningful evidence of activity starting to take place.
“Looking
at its own investment pipeline, what it's underwriting today and talks with
lenders, Noble expects 2025 to be a 'very active year' for transactions,
Bhoopathy said. It will take time for buyers to actually secure that lending
with the lower rates, so more movement will likely take place in the latter
half of the year, but the deals process takes time anyway.
“We
feel like it’s going to be robust activity, and definitely more in the second
half onward.
Availability of financing is the biggest driver of new development, and the restrictions and bank regulations will continue to be an obstacle.
Adi Bhoopathy
“As
far as new development goes, while the lowering cost of
debt is a factor, the main thing will still be the equity requirements from
lenders. Availability of financing is the biggest driver of new development,
and the restrictions and bank regulations will continue to be an obstacle.
“New
supply will start showing from high-quality sponsors early on, but the general
marketplace will be a laggard. Most markets have recovered, but not
everywhere. Not every market needs more supply than what’s currently in place.”
Greg Mount, founder, CEO, Victory Hotel Partners, Denver
“In most
markets a 50-basis point shift in interest rates can influence hotel
development and M&A activity, as it alters financing costs and affects
investment appetites, potentially leading to cautious decision-making and a
reevaluation of project viability. However, the current market has been
volatile regarding the bid-ask spread, the value that will attract capital
versus the perceived risk. Therefore, we do not expect any significant changes
to the current capital markets because of a 50-basis point spread.”
Michael Bellisario, analyst R.W. Baird, Chicago
“Lower interest rates –
multiple positive drivers for the global hotel brands: (1) Higher overall valuation multiples (i.e.,
lower discount rates); (2) more accretive debt-funded share repurchases; and
(3) a brighter light at the end of the construction tunnel as lower borrowing
costs should help the development math better pencil (at least a little bit;
construction loans are floating-rate debt). Also, lower interest rates could
jumpstart real estate transactions, which could result in more conversion opportunities/wins
for the global hotel brands.”