CNBC: Fed Rate Cuts: A Game-Changer for Commercial Real Estate Investors or a Head Fake?
Peachtree CEO Greg Friedman was on CNBC's Fast Money discussing the effect of the Fed's recent rate cuts on the Commercial Real Estate market.
"Extend and Pretend"—Just as Hamlet famously questioned, "To be or not to be," we are also on the brink of a crucial revelation. Are we facing a seismic shift with sustained higher interest rates, a largely overlooked issue? How will this shift affect commercial real estate and other asset classes in both the short and long term? Are the public and private sectors ready for what appears to be the inevitable? Today, we face more questions than answers, and indecision is no longer viable in a higher interest rate environment.
Unlike in the past few downturns, such as COVID, the Global Financial Crisis and the dotcom bust, the Fed significantly reduced interest rates, enabling owners of commercial real estate and lenders to easily engage in "Extend and Pretend," even when cash flows were negative or razor-thin, thanks to the exceptionally low interest costs.
Today, we are in a commercial real estate recession showing no signs of abating. The economy boasts considerable strength, driven by a strong job market, and record liquidity is on the sidelines. I do not see the necessary catalysts to revert interest rates to levels seen in previous cycles. Therefore, I don't see “Extend and Pretend” to be an effective strategy and would prepare for more bankruptcies, foreclosures and forced sales as reality sets in that we are in a new rate paradigm or maybe just a return to normalcy that, unfortunately, will be destructive to values, especially to the lower cap rate assets. Ultimately, amidst any market disruption, there will be pivotal opportunities for those with the decisiveness and the liquidity to seize them at the right moment.
This commentary originally appeared on Greg Friedman's LinkedIn page on May 1, 2024, in response to a Wall Street Journal article titled: Even If the Fed Cuts, the Days of ultralow Rates are Over.
Follow Greg Friedman and Peachtree Group on LinkedIn
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The Federal Reserve's 50 basis points cut to the Fed funds rate in September has sparked fresh conversations about its impact on commercial real estate (CRE) investments. While there's optimism in some corners about a return to a lower rate environment, the bond market signals a different story, with long-term rates remaining high and inflation risks persisting. This is a good reminder that short-term rates, set by the Fed, and long-term rates, like the 10-yearTreasury, often move independently.
Today's higher rate environment reshapes the value fundamentals of CRE. The current 10-yearTreasury rate of around 4%—double the pre-2022 average—demands that CRE values recalibrate. Reports of a 20% drop in CRE values since 2022 peak levels require context; those valuations were rooted in a vastly different interest rate environment. Today’s scenario implies a slower growth trajectory, requiring investors to adapt to a "new game" of higher rates for longer.
Across CRE assets, different sectors respond to higher rates in distinct ways. Hotels, for example, benefit from solid demand as travel returns, while multifamily assets continue to show resilience despite refinancing pressures. Office assets, however, face significant stress due to both secular and rate-driven challenges.
Even as the Fed cuts rates, refinancing on previously low-rate debt presents ongoing challenges for CRE assets, especially those with upcoming maturity dates. Higher rates elevate the cost of debt and squeeze cash flows while impacting the overall asset valuations, placing additional stress.
Despite headwinds, the current environment offers unique opportunities to strategic, agile investors. While higher rates may drive down asset values, for those prepared to navigate today's market with moderate leverage and a forward-looking strategy, today's challenges can evolve into future tailwinds. As the Fed's recent moves signal a "higher for longer" era, CRE investors who adapt swiftly may find unprecedented opportunities, making this a prime moment for decisive action in commercial real estate.
See Peachtree Group’s CEO and Managing Principal, Greg Friedman discuss this topic on CNBC’s Fast Money.
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Avoid Political Noise When Investing: A Market Update with Larry Adam, Raymond James
Peachtree Group hosted Larry Adam the Chief Investment Officer of Raymond James for a recent Market Call. Larry talked about the importance of staying invested throughout political cycles like the upcoming US Presidential election.
In our recent market update call, we hear insights from Larry Adam the Chief Investment Officer of Raymond James, alongside Greg Friedman, Managing Principal & CEO of Peachtree Group and Daniel Savage, VP Equity Capital Markets of Peachtree Group. One of the standout moments from the discussion was an intriguing investment takeaway that highlights the importance of consistent investing over trying to time the market based on political cycles.
Investment Insights Through the Decades
Consider this: if you had invested $10,000 in the stock market starting in 1970 and only remained invested during Republican presidencies, your investment would have grown to approximately $133,000 by now. Conversely, if you had only stayed invested during Democratic presidencies, your portfolio would have soared to around $700,000.
Now, here’s where the numbers become even more compelling. If you had stayed fully invested in the market, regardless of which party was in power, that initial $10,000 would have appreciated to an impressive $1.6 million!
The Lesson: Stay the Course
Timing the market based on political affiliation has proven to be less effective than maintaining a consistent investment strategy. As Larry Adam pointed out, “It's more important to be in the market than trying to find the market. I think that's a critical lesson…”
The volatility that comes with political changes can tempt investors to pull back or make hasty decisions. However, history shows that those who remain patient and invested through all market conditions tend to reap the greatest rewards.
The key is to be in the market, not trying to outsmart it.
About Larry Adam
Larry Adam joined Raymond James in 2018 as Chief Investment Officer. With over thirty years of experience in the financial markets, Mr. Adam brings a wealth of knowledge and valuable insights on the markets and economy to advisors and clients. As CIO, Mr. Adam develops the firm’s CIO view, a cohesive and comprehensive macro outlook, using insights and perspectives from the firm’s strategists. Mr. Adam presents at numerous client events and is renowned for his ability to explain complex concepts to investors.
Mr. Adam provides advisors and clients with in-depth guidance regarding the markets, including weekly and monthly commentary and quarterly outlooks. In addition to serving as President of the Investment Strategy Committee, he also sits on the Global Wealth Solutions (GWS) Diversity & Inclusion Campus Recruitment Committee, the GWS Executive Council, and the Alternative and Structured Investments Product Approval Committee.
Prior to joining Raymond James, Mr. Adam held the dual roles of CIO of the Americas and Global Chief Investment Strategist for Deutsche Bank Private Wealth Management. He received a B.B.A. with a concentration in finance from Loyola University Maryland in 1991 and received a master’s degree in business with a concentration in finance from Loyola University Maryland in 1993. Mr. Adam is an adjunct professor at the Sellinger School of Business and Management at Loyola University, teaching classes in International Finance. He received the Chartered Financial Analyst designation in 1996, the Certified Investment Management® certification in 2001 and the Certified Financial Planner® designation in 2004. Mr. Adam is regularly featured on CNBC and Bloomberg and is frequently quoted in well-known publications such as the Wall Street Journal and Barron’s.
Barron's: The Fed’s Rate Cuts Won’t Save Commercial Real Estate
Peachtree CEO Greg Friedman explores the challenges facing the commercial real estate industry in light of the Federal Reserve's recent interest rate cuts.
Peachtree Group CEO Greg Friedman penned a recent article for Barron's - "Soft Landing Means a Hard Fall for Commercial Real Estate."
In the article he explores the challenges facing the commercial real estate industry in light of the Federal Reserve's recent interest rate cuts. With $1.5 trillion in CRE loans set to mature and refinancing becoming more expensive, Greg outlines strategic opportunities for investors, including capital-stack repositioning, private credit solutions, and distressed asset acquisitions.
As the market adjusts to higher borrowing costs, this is a must-read for anyone looking to stay ahead in commercial real estate. Click here to read the full article in Barron's.