The Fed Cut Rates. Now What?

We’ve all been waiting with anticipation for this day to come. Market participants have made their case to be on Fed Chair Jerome Powell’s nice list. Their hopes locked on a 50 basis points rate cut like visions of a shiny new toy on Christmas morning. Ready to trade immediately on the news. To make prognostications about further cuts. To opine on which direction the market will go next. Santa Claus has nothing on Jay Powell.

That day came today, and, like Christmas, it was met with jubilation and a thud. Jubilation from the start of an easing cycle. This is the first of many cuts. All with the goal of making financial conditions easier. To push asset prices higher. It was also met with a thud because, to some, it wasn’t enough. It was the wrong gift. The wrong size. It didn’t meet the moment appropriately. They believe the Fed is behind the curve. You can’t make everyone happy.

Yet, the rate cutting cycle has begun. Interest rates have finally been cut after two-plus long years. But what does a 50bps cut really mean? Not a whole lot, practically speaking. You’re probably not going to run out and buy a house or a car on the news. Nor are you going to liquidate your money market account. The difference between a 5.3% and 4.8% interest rate isn’t enough to make you so trigger-happy that you sell.

What the rate cut does do is reset our expectations. Usually, the first interest rate cut precedes many more. The size of the rate cuts also tends to grow as the Fed works to buttress a recession. Perhaps a recession won’t occur this time, if they can stick the soft landing. But future rate cuts are expected, nonetheless.

How far the Fed ultimately cuts rates is entirely dependent on the strength (or weakness) of the labor market. Regardless, those 5%+ money market accounts will be a thing of the past. If you were fortunate to lock in a 10-year treasury at 5%, good for you. Unfortunately, money market rates will move down in lockstep with the Fed. Now is the time to start planning for an environment where short-term yields aren’t a panacea.

Real estate should benefit from a declining rate environment as the math is improving for real estate. With cap rates (i.e., yields) in the mid-5% range, on average, and debt costs now around 5%, there’s positive leverage across the market. That means yields on multifamily real estate will soon surpass those of money market funds. There will be less of an argument to stay in cash. As the spread grows between cap rates and the cost of debt financing, transaction volume will pick up for multifamily sales. This will help set pricing in markets where there has been little activity. This also represents an opportunity. Buying when activity is low is the best time to buy. And less competition generally means better pricing.

Real estate can provide what money markets can’t—appreciation. Appreciation is what supercharges investment returns. And since 2022, it has been absent from the multifamily market. We believe it’s coming back. The high-interest rate regime put the brakes on new apartment construction. CoStar estimates that only 274,000 new apartment units will be delivered nationally in 2026. That’s the lowest level since 2013. This dynamic will lead to out-sized rent growth in 2026 and 2027. As we know from past cycles, growth in rents will lead to growth in income. And higher income means higher values. Despite information to the contrary, many investors will expect high growth rates to continue indefinitely. That drives down cap rates (i.e., increases values) even more. It pays to get in early.

A new real estate cycle is about to get underway. Those who are bold enough to acquire properties when fear permeates the market do best. The broad-based fear will soon start to wane as lower rates bring confidence back to buyers. There’s also widespread belief in rents (i.e., revenue) accelerating in 24 months. If sidelined buyers think 1) revenue will increase and 2) values will rise, the market will move upwards once again. The best time to take advantage of the multifamily market is now. Not after the Fed ends its rate cutting cycle. But now.

Learn more in our webinar Why Now is the Time to Invest in Multifamily.
Register here: https://us06web.zoom.us/webinar/register/WN_NN9jWzqbTlmHix1CzMQavQ