According to market participants, the pressure is on the Fed to cut interest rates sooner rather than later but that hasn’t been enough to move the Fed’s hand. The Fed hasn’t cut rates yet because it seems to be more concerned with the labour and stock markets than it is with the commercial property market.
Commercial Property Market Woes
The commercial property market is screaming for reduced rates as CLO delinquencies rise steadily, this sentiment is also echoed in commercial office space buildings. Commercial office space is selling at a massive discount in many cities across the United States as high rates have kept property investors off the table despite a ‘return to office’ employment trend. The following are some commercial office space building sales in 2024:
- 264k square foot office building in Ohio: $2.4 million
- 164k square foot office building in downtown Minneapolis: $3.8 million
- 290k square foot office building in downtown Baltimore: $4 million (starting bid)
A Strong Labour and Stock Market
One of the following sentiments are true, or even both:
- Market participants are utilizing high amounts of margin in their trading because they believe interest rates will be coming down soon (lowering their carrying costs), AND/OR
- Market participants are utilizing high amounts of margin in their trading because they believe the gains in the stock market will outpace the carrying costs of their margin debt over the next 12 months.
So When Are Interest Rates Coming Down?
As of right now, according to trading in interest rate futures, there’s a 65.9% chance of a rate cut at the Fed’s meeting in June. Looking forward to July, rate futures are showing an 81.6% chance of a rate cut which could be perceived as all but guaranteed. Market participants will likely be speculating on the likelihood of the June rate cut when making portfolio moves and betting the farm on the July rate cut as probabilities would suggest. In the interim the commercial property market will likely continue to deteriorate and the unemployment rate could have some buoyancy going into the summer.
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