Some might think that the upcoming election in 2024 will influence the Fed’s rate policy – leaning toward lowering those rates. Don’t count on it.
Speaking on a news video produced by Marcus & Millichap, John Chang, its Senior Vice President and National Director of Research and Advisory Services, said that while he can’t definitively say what the Fed’s policy will be in 2024, historically speaking, interest rate movements during election years have not been measurably different from non-election years.
Looking all the way back to 1955, the federal funds rate has gone up in election years 10 times by an average of about 135 basis points and the overnight rate has gone down seven times by an average of about 140 basis points.
Naturally, some people may ask if there’s a bias based on which party is in power at the time of the election, but Chang couldn’t find any political bias driving rate decisions in election years.
He also didn’t see any irregular rate movements in September or October of election years just before the vote.
The 10-year treasury, Chang said, “is far more important to commercial real estate lending rates and much more difficult to potentially manipulate, and there was almost no difference between election years and non-election years.”
Chang also addressed the question of when interest rates might get back to normal. But first, he tried to define what is normal. That opinion, he said, is based on when the person asking got into the real estate market.
“Investors who became active in real estate after the global financial crisis have been operating in a very unique interest rate climate,” Chang said.
From 2009 to 2021, the average 10-year treasury rate was 2.3%.
Investors who were in the business between 2001 and 2008 were operating in a climate with a 4.4% average 10-year treasury.
The average 10-year treasury over the long term is 5.6%. And today the 10-year treasury is well below that in the 4.25% range, he said.
In fact, prior to the second half of 2002, the last time the 10-year treasury was at 4.25% was in 1965.
“So, from a historical perspective, the current interest rate climate is actually quite low,” he said.
“Yes, interest rates are higher than they were through much of the last 15 years, but since the financial crisis, the Fed has wanted to raise rates and create some dry powder to use in the event of a recession.”
Chang said that given rates are a bit higher today, he believes the Fed will try to stabilize at this level, which is about on par with where rates were in the early 2000s, prior to the global financial crisis.
“That may become the new normal going forward,” he said.
Of course, no one can predict what interest rates will do as there are a lot of forces affecting rates, Chang added.
“Assuming we are in the new normal, the commercial real estate market will take some time to recalibrate to the current interest rate climate,” he said.
“We’re navigating the recalibration process right now and cap rates have been migrating higher as investors adjust their expectations.
“However, I wouldn’t expect cap rates to move up too dramatically because commercial real estate has become a more mainstream investment class that’s drawing from a broader range of capital.”
As a result, the amount of money waiting for commercial real estate opportunities has grown significantly, according to Marcus & Millichap, and that wall of capital will restrain the upward movement of cap rates.
“Where cap rates ultimately stabilize will depend on the property type, the asset quality, the location, and a variety of other factors,” Chang said. “But I do expect the market to find its footing pretty soon. We’re already seeing the market navigate the price discovery process and the expectation gap has begun to narrow.”