CRE Investors Poised to Deploy Capital After 50 BP Interest Rate Cut

Less than 24 hours after the Federal Reserve‘s surprise 50 basis point (bp) interest rate cut, investors displayed optimism for more capital flowing toward commercial real estate properties at Commercial Observer’s inaugural Institutional Investor & Private Equity Forum.

The Thursday morning event at The Bankers Club in Lower Manhattan occurred on the heels of the central bank’s Wednesday afternoon decision to lower its benchmark interest rate by a half a point to between 4.75 percent and 5 percent, after many economists projected a smaller 25 bp cut. It marked the Fed’s first interest rate cut since a 100 bp slashing to near-zero borrowing levels on March 16, 2020, early in the COVID-19 pandemic, which was later followed by 11 hikes in 12 meetings from March 2022 to July 2023. 

Robert Rothschild, senior vice president at InterVest Capital Partners, said he expects the Fed’s new direction of lowering interest rates to open more doors for lenders supplying acquisition debt by spurring more property transactions that generate clarity on valuations. Fed Chairman Jerome Powell said Wednesday that Federal Open Market Committee participants project short-term interest rates at 4.4 percent at the end of 2024 and 3.4 percent by the close of 2025 if the economic situation “evolves as expected.”

“Lowering interest rates is going to open up the purchase and sale market a little bit more,” Rothschild said during the forum’s first panel, “Exploring Deal Structure and Transaction Trends in the CRE Market,” on the 40th floor of Silverstein Properties’ Equitable Building. “Buyers are going to get a little bit more aggressive because the financing is going to be cheaper and that bid ask spread is going to come in, which could potentially actually lead to less preferred equity needs in the market.”

Drew Fung, managing director of debt investment at Clarion Partners, said the “market psychology” received from the Fed’s decision will also help spur more loans for acquisitions and refinances. He noted that previously many CRE market participants were reluctant to proceed with deals due to concerns about volatility and continued higher rates.

The first panel also featured Kory Geans, chief investment officer at Middleburg Communities. It was moderated by Meyer Mintz, partner at Citrin Cooperman. 

The Fed’s forecast for lower rates also has the potential to compress capitalization rates, which many CRE market experts hope will lead to increased property values and encourage more investment activity while also boosting refinance opportunities.

Jacob Slone, managing director at Harbor Group International, said in the last two weeks there has been “significant shifts” for cap rates to the point of now being able to borrow at positive leverage for many sectors. He noted that as recently as eight to 12 weeks ago, sponsors for healthier asset classes like multifamily and industrial were forced into neutral or even negative leverage scenarios, which kept many investors on the sidelines.

Slone added that cap rates for office properties have also come down slightly, but the trend is very market specific, with New York City establishing more discovery on values than San Francisco.

Greg MacKinnon, director of research for the Pension Real Estate Association, noted that the office sector for decades was “the bedrock of a core portfolio,” but that is no longer the case and the sector has turned into a riskier play for investors. 

“I believe that somebody is going to make a lot of money in office at some point down the road, but it’s probably not going to be in the next year or the next two years,” MacKinnon said during the second panel, “Institutional Investor Spotlight: Shifting From Capital Preservation to Deployment,” which was moderated by Adi Divgi, founder of Divino Global Holdings. “It’s become an opportunistic thing, and unless you have a really well thought out strategy to earn pretty high returns, institutional investors aren’t really interested in the sector.”

David Levine, co-head of Americas Acquisitions at Blackstone Real Estate, said the Fed’s new direction toward lowering interest rates has been anticipated in the CRE market for some time, noting that commercial mortgage-backed securities originations are at $66 billion now compared to $39 billion for all of 2023. 

“The path of time has been clear for some time now,” said Levine during a keynote interview led by Max Gross, editor in chief of Commercial Observer. “What is happening now is not surprising to us.” 

Levine said lower interest rates should spur more transaction volume and investment activity while also encouraging more equity players to emerge from the sidelines. He said Blackstone’s acquisition pipeline is heavily centered around sectors with long-term secular tailwinds including rental housing, logistics and data centers. Blackstone deployed $15 billion of equity across its CRE business in the first half of 2024, up two and a half times from the year before, according to Levine. 

Nicholas Baccile, director of Canyon Partners Real Estate, said Wednesday’s Fed action was partly already priced into the market, and he doesn’t see it as a “guiding principle” for CRE opportunities going forward. He said there is potential for upside with preferred equity investments or buying nonperforming debt with an attractive basis and yields.

“We’re really a relative value investor,” said Baccile during the forum’s fourth session,”Examining LP Appetite for Opportunistic Credit, Distressed Debt and Special Situation” moderated by Adam Gibbons, co-head, chief investment officer at GID Credit. “On the opportunistic debt side of our business, where can we achieve the most attractive risk-adjusted return from an LTV standpoint from a yield standpoint from a basis standpoint, and what does that return look like?”

Nicco Lupo, director in JLL’s capital markets group, said his team has largely avoided development deals over the last 18 to 24 months, but he hopes to “lean into that” more in 2025. Lupo said most of the transaction pipeline has involved the New York, Boston and South Florida markets with a big focus on multifamily and industrial in addition to alternative sectors like data centers.

The panel also included Sebastian Post, managing director, co-head of investments at Lionheart Strategic Management; Collin Laffey, managing director, real estate at LFPI; and Steven Parrinello, managing director, Fortress Investment Group.

The outlook for financing affordable housing projects was tackled in the next panel, “How are Institutional Investors Addressing the Affordable Housing Crisis?” which was moderated by Amanda Nunnink, senior managing director of multifamily at Kayne Anderson Real Estate.

Jason Bordainick, managing director and co-founder of Hudson Valley Property Group, said there is a big opportunity in the affordable housing space to generate other services at these multifamily developments like social services, health care and high-speed internet through government subsidies.

“Affordable is uniquely positioned to capitalize on it because you have federal programs that are funding a variety of other services,” Bordainick said. “Part of our value-added plan is adding services which are obviously impactful on the social side, but it’s also now increasing the value of the real estate.”

The affordable housing panel also included Fabiola Edouard, vice president, asset management at The Vistria Group, and Tim Doherty, chief investment officer at Safehold (SAFE).

Brian Pieracci, managing director, head of North American private equity at Heitman, said he hopes the interest rate cut will encourage investor clients he works closely with such as pension funds to map out more deals for 2025.

“I think now that there’s clarity on what the first cut is it gives people a baseline to sort of react to that — and not just on the capital allocation side, but also just on the transaction side,” said Pieracci during the event’s final panel, “What’s Driving Investor Demand Around Specific CRE Asset Classes?” moderated by Susan Kolasa, managing director at J.P. Morgan Asset Management Real Estate. “Now that it’s in the rearview mirror one day ago, it should allow people to start to talk about moving capital.”

The final panel also included James Simmons, CEO and founding partner at Asland Capital Partners, and Steve Plenge, CEO of Pacific Retail Capital Partners. 

Simmons stressed that it may take some time for transaction activity to truly take hold since many lenders remain stuck with impaired balance sheets.

“It’s going to take a while for them to clear out what they want to get rid of or restructure what they want to keep before they become extremely active,” Simmons said. “I don’t know if that’s three months from now or six months from now, but today the only thing that’s changed in the world is that we have 50 basis points in our favor to deal with, which is positive.”

Andrew Coen can be be reached at acoen@commercialobserver.com