# Fed’s Fourth Rate Hike of 2022: Commercial Real Estate Impacts

Aug 2, 2022

For the second consecutive month, the Federal Reserve raised its federal funds rate three-quarters of a percentage point on July 27, setting its benchmark rate to a target range of 2.25% to 2.50%.

This latest increase is the Fed’s fourth rate hike this year since its initial quarter-point increase in March. The central bank is continuing to raise rates to combat rising inflation, which is at a four-decade high of 9.1% as of June.

The Fed reasoned that the imbalance between supply and demand fundamentals due to the pandemic and the Russian-Ukraine war is driving high inflation. It aims to reduce the inflation rate to its long-term target of 2% while avoiding dragging the U.S. economy into a recession.

The latest hike is expected to put pressure on transaction activity in the commercial real estate industry, but high demand should continue to support certain sectors.

## What Does the Latest Interest Rate Hike Mean for Commercial Real Estate?

Rising interest rates are expected to continue pushing mortgage and capitalization rates higher for the commercial real estate industry, Sam Chandan, dean of New York University’s Schack Institute for Real Estate, told Commercial Observer following the Fed’s latest rate hike. Experts also anticipate a slowdown in activity as financing becomes more expensive.

The high inflation and multiple rate hikes this year have already decreased lending activity and reduced deal volumes for commercial property, according to The Wall Street Journal. In the second quarter, there were 8,500 commercial property transactions, down 22% from the same quarter in 2021, The Journal reported via data from MSCI.

Despite the headwinds of high interest rates and inflation, various sectors of the real estate industry are expected to continue performing well for the remainder of the year, according to J.P. Morgan’s midyear commercial real estate outlook. For example, record prices of for-sale homes and higher mortgage rates are continuing to make renting look more appealing than buying, boosting the multifamily sector, the report indicated. The demand is also supporting multifamily rents, as the average U.S. asking rent increased $19 in June to a record$1,706, according to the latest Yardi Matrix Multifamily Report. The average asking rent in single family build-to-rent (BTR) properties also notched a record high in June of \$2,071.

The industrial sector has continued to be another strong performer this year, which the J.P. Morgan report highlights benefits from the continued growth of e-commerce. Furthermore, the report identifies strip malls with groceries, salons, and fast casual restaurants, in densely populated areas as another strong sector, while Class B and C malls could be targets for adaptive reuse.

## Is the U.S. Economy in a Recession?

While a recession has not been officially declared, by some counts the U.S. economy may have already entered a downturn.

One general definition of a recession is two consecutive quarters of negative growth in gross domestic product (GDP). A day following the latest interest rate hike, the Bureau of Economic Analysis released estimates for second quarter GDP, which decreased 0.9%, marking a second consecutive quarter of negative growth. (First quarter GDP decreased 1.6%.)

Despite the weaker economic result, the labor market is very strong with unemployment at 3.6% in June, and average hourly wages increased 5.1% from the prior year. The hot jobs market, which has added 2.7 million jobs this year, has lead Fed Chairman Jerome Powell to note that he doesn’t believe the economy is in a recession.

The National Bureau of Economic Research (NBER), a nonpartisan organization which identifies recessions and expansions in the economy, defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

NBER uses six indicators, such as industrial production, employment, and retail sales, to determine whether or not the economy is in a recession, and statistics for each of the indicators have grown this year, leading experts to theorize that NBER is not likely to declare a recession yet. However, 63% of economists surveyed by CNBC believe that the Fed’s rate hikes will lead to a recession in the next 12 months.

## What Comes Next?

The Federal Open Market Committee’s (FOMC) next scheduled meeting is September 20 – 21, and experts anticipate that the central bank will slow the rate of increases to maybe a half-point increase. Economic data between now and the next FOMC meeting could change drastically, possibly affecting the Fed’s decision. While additional rate hikes are a concern, supply chain issues, which have plagued the economy since the COVID-19 pandemic, have shown early signs of easing.

Experts have predicted that there may be a slowdown in commercial real estate activity this year from record investment activity last year, however, certain sectors — such as multifamily, build-to-rent, and industrial — are still expected have solid results due to strong demand.