What Will Falling Interest Rates Mean for Real Estate? Here’s What History Tells Us

As real estate investors prepare for a possible interest rate cut, many are already factoring it into their decisions for loans and new developments. Historically, real estate markets can shift as unpredictably as fashion trends, and while rates could drop faster than anticipated, the effects may take time to materialize.

The Federal Reserve increased rates 11 times between 2022 and 2023 to curb inflation, and real estate professionals are now expecting a slow response to rate cuts. Many experts advise caution, noting that rate reductions might not lead to an immediate surge in real estate activity. Instead, they recommend a long-term view, as the impact of lower rates could take months or even years to filter through the economy.

Some experts also suggest that rate cuts could signal economic weakening, which may bring concerns about a potential recession, though fears of a major crash remain lower than in previous cycles. This is partly due to the fact that today’s real estate market is more disciplined than during past boom-and-bust periods like 2008, when over-leveraged deals led to widespread collapse.

At the same time, high borrowing costs and the shift toward hybrid work have opened opportunities for cash-rich investors to acquire office properties at discounted prices. Interestingly, a falling interest rate environment could help office landlords, as a slowing economy might shift bargaining power back to employers, potentially encouraging more employees to return to office settings. While this is speculative, it remains one possible outcome of the current economic shifts. To learn more on  the Federal Reserve and interest rates, refer to this source.

‍Inland REIT Returns to Exploring Company Sale

Inland Real Estate Income Trust (REIT), which owns a portfolio of grocery-anchored shopping centers valued at $1.5 billion, has once again begun exploring strategic alternatives, including the possibility of a company sale. This comes after the company first considered a sale two years ago, only to halt the process due to rising borrowing costs.

Now, with borrowing rates showing signs of decline, Inland REIT is reevaluating its options, particularly after changes in leadership following the death of the former chairman and the resignation of the CEO. The trust owns 52 retail properties across 24 states, with a total of 7.17 million square feet of leasable space and an impressive 92.5% occupancy rate.

Investor interest in grocery-anchored centers has increased, driven by their consistent consumer demand and the limited supply of new properties. Inland REIT's portfolio is focused on grocery-anchored centers, minimizing its exposure to big-box retailers, a sector that has faced challenges in recent years.

The company is also considering listing its stock on a national securities exchange as part of its strategic review. Inland REIT has engaged a financial adviser to assist with this process but has no formal timeline set for a decision. In the meantime, the REIT has suspended its distribution reinvestment plan and share repurchase program to focus on the review. For more information on Inland REIT's strategic exploration, read the full article on CoStar.

Retail Investment Sales Nearly Surpass Multifamily Trades in Orlando as Deal Volume Falls to 10-Year Low

Despite strong renter demand in Orlando’s multifamily market throughout 2024, investment sales of apartment buildings have plummeted to a 10-year low. Key challenges for the sector include high insurance costs, elevated interest rates since 2022, and negative rent growth, all of which have weighed heavily on investor sentiment.

In contrast, other commercial real estate sectors in Orlando, including office, industrial, and retail, have seen increased sales activity in 2024, bouncing back after a challenging 2023. The industrial sector, in particular, experienced the largest year-over-year growth, with sales increasing by 22%.

Collectively, these sectors generated $2.3 billion in sales during the first eight months of 2024, which is significantly lower than the $4.6 billion achieved in 2021. A key trend is the decline in multifamily sales, which represented 63% of total investment in 2021 but only account for 31% in 2024.

This decrease is due to investor caution ahead of the 2024 election and the potential for interest rate cuts, with many investors choosing to hold off on transactions until 2025. The expectation is that the start of the new year could bring a resurgence in deal activity, especially if rate cuts materialize and create a more favorable investment climate. For further insights, check out this CoStar article.