Can the new interest rate cut lead to an asset bubble in the industrial sector? Or will it result in more sales?
The Fed cut the federal funds interest rate Wednesday by a quarter of a percentage point to about 2.25 percent to protect the U.S. economy from an economic slowdown. As justification for the first-rate cut since the height of the Great Recession, the Fed cited concerns over the slowing global economy and trade war with China.
In the short term, “commercial real estate investors will likely take the decision as a signal to continue buying property, even at lofty valuation levels,” says Ryan Severino, chief economist with real estate services firm JLL. “This could extend the trend real estate markets worldwide have seen during the last decade, with investors piling into the (industrial) asset class amid a hunt for higher yields and stable returns.”
The rate cut will also likely decrease the cost of construction and give REITs a boost, notes Byron Carlock, national real estate leader with consulting firm PWC.
In the longer term, however, Severino says the rate cut “risks widening the rift between market expectations and the underlying economic reality, which could form the seeds of an asset bubble. Since we did not see a strong chance of the economy backsliding into negative growth over the rest of this year, if there was no cut, the risks associated with the Fed’s decision may be greater than any boost to the market.”
For example, industrial property type would normally be the first sector to be affected by a trade war, but demand for industrial properties remains strong, vacancy is low, rents are still growing, and the development pipeline is robust. Unless there is negative sentiment over trade that causes companies to pull back on investment and hiring, consumer spending and e-commerce growth will likely keep the industrial sector strong, Severino says.
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Patricia Kirk | Aug 02, 2019