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The U.S. Fed’s interest rate cut, and stock market fluctuations could be good news for Canadian commercial real estate market – here’s how
Last week, the U.S. Federal Reserve cut its key interest rate by 25 basis points to 2.00 - 2.25%, to brace the U.S. economy against the risk of a global economic slowdown and rising trade tensions. The Bank of Canada is tempering its outlook as well and taking a “wait and see” approach to rates. Stock markets fluctuated dramatically in response to shifting sentiments with the Dow falling nearly 1,000 points during one trading session.
It’s the first cut of 2019, and the first since the 2008 financial crisis, when rates were cut to historic lows where they remained for years. It’s also a shift from the multiple rate hikes the Fed had hinted would be coming throughout the year. While the U.S. economy remains strong, global trade concerns and a stubbornly low inflation rate seem to have prompted the central bank to rethink its monetary policy.
Of course, any time interest rates move there are questions about what the impact will be on cap rates and commercial real estate investment generally. CBRE has all the information investors, owners and occupiers need to understand how this development could impact their business.
Cap Rate Compression
Whenever uncertainty in global markets makes itself known, commercial real estate emerges as a safe harbour for investors. According to CBRE Research, lower interest rates and recent equity market fluctuations should keep real estate markets attractive for investors and influence global capital flows.
Capitalization rates, or cap rates – the expected rate of return on an investment property – have been historically low for years, in line with low interest rates.
While further cap rate compression may be possible in some markets, this latest interest rate cut and the subsequent dip in Canadian and global bond yields should ensure that commercial real estate remains an enticing option for capital. Furthermore, the recent equity market volatility will leave many looking for safe havens and income producing investment vehicles. The bottom line? Commercial real estate will remain centre stage with investors.
Lower interest rates are good news for those looking to borrow, increasing investment opportunities for many current and would-be commercial real estate investors. The market has been riding a wave of momentum for the better part of a decade, and the most recent rate cut should keep the market attractive for investors in the coming months.
As the cost of borrowing remains low and competition for quality assets increases, it’s important to work with a commercial real estate professional you trust. CBRE helps clients make decisions to align and improve their real estate performance and objectives with unique insight, experience and solutions for occupiers, owners and investors.