Fed's Rates Have Less Impact than Confidence in Economy

NEW YORK CITY-Alan Greenspan lowered interest rates yesterday (June 27) for the sixth time this year to bring many of the specific rates to their lowest point since the recession of the early 1990s. Designed to revitalize a sagging economy, the reduction actually spurred a drop on Wall Street following the announcement. Tim Welch, executive managing director of Financial Services for Cushman & Wakefield tells GlobeSt.com the impact on commercial real estate may not be as significant as some may think.

“As important as rates are,” Welch says, “from the perspective of the investment community, the economy is much more important right now than interest rates. Right now there’s a tremendous uncertainty in the national economy with companies reporting they’re missing revenue targets and in general the news these days is less than favorable. That’s impacting the real estate community more than interest rates coming down another quarter of a percentage point.”

While he says he doesn’t think this latest announcement is “going to have a substantial positive impact,” he says that certainly “it’s good news.” Unfortunately, he says it just isn’t going to be enough in and of itself. “The climate will improve when people get a sense that things are improving in the economy across the board. That’s true for commercial real estate, stocks or bonds for that matter.

“Uncertainty undermines the health of the market,” he says. He does note that lower mortgage rates can “make borrowing more attractive, but militating against that is that most lenders have said they will not go beyond a certain floor. As the Fed lowers its Fed Funds Rate, rates on treasuries go down, but most lenders have been saying they’re not going to make loans for less than 7% no matter what the 200 basis point spread is.”

He says the rates give owners more options in terms of raising money. Property owners can choose not to sell, but to get a loan instead with mortgage rates coming down and Welch says right now they are comparatively low. “Owners don’t have to pay any taxes on the loan, so it’s a tax efficient way to raise money and it could be attractive to owners who may not find buyers willing to pay their asking prices in an uncertain economy.”