Colorado-Real-Estate-Journal_431468

Page 12 — Retail Properties Quarterly — November 2024 www.crej.com FINANCE W ith the 2024 election now behind us and President- elect Donald Trump set to take office in January, uncertainty around inter- est rates is intensifying. The day after the election, the 10-year Trea- sury rate rose by 14 basis points to reach 4.433% – a move investors anticipated, reflecting the market’s response to potential Republican- led tax cuts and tariffs. In recent months, the Federal Reserve has been tweaking interest rates to stabilize the economy in light of economic pressures. After a period of 11 rate hikes from 2022 to 2023 that pushed rates from near- zero to a range of 5.25%-5.5% by mid-2023, the Fed made a shift in September with a 50 basis-point cut – the first rate reduction since early in the pandemic. This was followed by a smaller 25 basis-point cut in early November, bringing the target range down to 4.5%-4.75%. These adjustments are the Fed’s attempt to support growth while tackling inflation as the economy enters a new phase. Understanding how these Fed moves influence commercial real estate lending is crucial for inves- tors. The federal funds rate and inflation often move in opposite directions: When inflation rises, the Fed increases the rate to make borrowing more costly, which helps cool down spending and lending, ultimately control- ling inflation. At the beginning of the COVID-19 pandemic, though, the Fed cut rates to near zero to encourage spending and stimulate the economy. This approach worked but contributed to the highest infla- tion rates in over 40 years – by June 2022, inflation hit 9.1%, the highest level since 1981. This low-rate environment during the pandemic also spurred a surge in CRE transactions, as borrowing became cheaper. In Colorado, retail property sales climbed to 2,200 transactions in 2021. But as rates increased, deal volume declined: 1,742 sales in 2022, 1,231 in 2023 and 1,035 so far in 2024. This drop mirrors the rising costs of borrow- ing, illustrating how higher rates have cooled the market. When you look at Denver’s retail sales along- side the historical 10-year Treasury trends, the connection is clear – higher yields often lead to fewer transactions. It’s worth noting, though, that the federal funds rate doesn’t directly set CRE lending rates. These loans are generally based on spreads over the five-year and 10-year Treasury yields. Lenders like banks, credit unions and insurance companies use these Treasury yields as bench- marks, adjusting their spreads depending on market conditions. This means that cuts to the Fed’s rate don’t necessarily translate into immediate rate drops for CRE loans. For instance, despite the Fed’s cuts in September and November, CRE lending rates held steady, with the 10-year Treasury even gaining 6 basis points following the Septem- ber cut to reach 3.702%. Treasury yields often reflect expected rate changes for the coming year, so lenders typically base decisions on these forward-looking indicators rather than on Fed actions alone. Looking ahead, projections from Derivative Logic suggest that the five-year and 10-year Treasury rates will continue to rise. For CRE inves- tors, this implies that interest rates might remain high for a while. Investors hoping for lower rates may need to wait longer, as elevat- ed Treasury yields could keep CRE lending rates high in the near term. How Fed rate changes impact CRE lending contact@axiore.com L E A S E D Denver’s Premier Boutique Commercial Real Estate Company 1060 Bannock Street Suite 300, Denver, CO 80204 3 0 3 . 5 9 2 . 7 3 0 0 | w w w . a x i o r e . c o m Contact Axio to discuss how we can maximize the value of your retail assets. We specialize in delivering unique solutions to make the impossible projects possible. RESTAURANTS • RETAIL • MIXED-USE • SHOPPING CENTERS • ASSET SALES Noah Harrison Senior analyst and associate, Blue West Capital Please see Harrison, Page 19