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High interest rates have not only whacked commercial investment transactions by more than 50% but also pushed commercial property prices down by 25% from their peak two years ago.
The Federal Reserve has delayed the rate cut due to consumer price inflation remaining above the desired 2% target. But interest rates are set to descend soon, putting an end to the hemorrhaging.
With massive apartment completions set to take place this year, the rent component of the consumer price index will steadily move from a recent level of 5.7% to nearly 0% in the upcoming months. This expected trend will help push down inflation and similarly affect interest rates.
Do not, however, expect super-low borrowing rates. The very large federal budget deficit will soak up more loanable funds, thereby leaving behind less to borrow in the private sector. The 10-year Treasury yield is likely to fall by at best 100 basis points, from 4.5% in spring to 3.5% early next year. The lowering of interest rates is still good news, as it will lead to more property transactions and price recovery for most properties in most markets. The downtown office market is still bleeding and, unfortunately, will not participate in the recovery.
