The Federal Reserve remains on the path of maintaining interest rates at near zero and monthly purchases of $120 billion in Treasury Bonds and mortgage-backed securities--with the intention to taper bond purchases in November if broader economic recovery progresses. Chairman Jerome Powell said the Board is generally positive about the U.S. economic recovery with the support of continued monetary policy, improvement of economic indicators and increased employment.

Conditions in the job market have continued to improve as demand for labor has climbed. Job gains have averaged 750,000 per month over the past three months despite a slowdown in August, likely due to rises in Covid cases. Meanwhile, the unemployment rate was 5.2 percent for the month.

Powell said, “This figure understates the short fall in employment particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year.

“Factors related to the pandemic such as caregiving needs and ongoing fears of the virus appear to be weighing on employment growth.”

Progress on containing the virus should lead to more rapid gains in employment and diminish those factors. The Fed estimates the unemployment rate will decrease to 4.8 percent at the end of the year and 3.5 percent in 2023 and 2024. This progress led to the Fed tentatively noting that it could raise interest rates a quarter of a point next year, but not everyone on the board is currently in agreement on this

“The Fed seemingly remains committed to near-zero interest rates until unemployment and other economic indicators stabilize,” said Matt Swerdlow, Director, Capital Services, Ariel Property Advisors. “This will continue to create advantageous conditions for borrowers, especially those investing in real estate, which will help hedge portfolios against potential inflation.”

The U.S. inflation report last week showed a slowdown in pricing surges from last month, which lowered fears among investors that low interest rates would drive out of control inflation. The Fed has argued that the rapid inflation of this past year has been more due to the unique circumstances of the pandemic and would stabilize. The data released by the Department of Labor seems to bear this out, especially as consumer behavior and supply chains are increasingly returning to normal

“The situation is a win-win for real estate investment,” said Swerdlow. “Lender appetite is strong, so If you’re in a market where rents are not regulated, inflation is passed through your rents. If your rents are regulated, you still have low interest rates and the stable dynamics of such a market.”

With people moving back into city apartments, vacancies are lowering across real estate asset classes, particularly in multifamily and affordable housing, Swerdlow added. “Leasing activity for multifamily was optimistic throughout the entire summer and rents are up on a month-to-month basis compared to last winter.”

Lender appetite post-COVID has certainly adjusted with a preference for highly stable, rent regulated multifamily assets. While the potential rent growth is limited, lenders are competing more aggressively for these opportunities by offering 10 - 20 bps discounts on rate on qualifying properties. In New York specifically, this applies to fully or partially affordable or rent-stabilized buildings.

Outside of the multifamily market, consumer behavior has led to strong industrial, manufacturing and logistics growth across the country. Driven by ecommerce and an enthusiastic lender environment, New York in particular is seeing this sector grow prodigiously over the past year and a half. The Fed’s current strategy means that the high-growth environment is likely to continue its path.

Similarly, grocery-anchored retail has remained popular as a stable commercial and retail subset in the wake of the pandemic. As an example, Ariel Property Advisors’ Capital Services division recently closed on a $6.45 million cash-out refinance for a grocery-anchored shopping center in North Dakota, influenced by the return of lender comfortability within the retail asset class. Indicative of the current climate, the loan featured a 3.45% fixed rate for 10 years on a non-recourse basis and returned all of the borrower’s capital from their initial investment only three years prior.

“Looking ahead, the Fed also showed little concern about inflation but investors across asset types must keep in mind The Fed’s biggest tool to hedge against inflation is raising rates,” said Swerdlow. “They have all the room in the world to do that and there appears to be no rush, especially with inflation slowing, but this low-cost environment will ultimately have a window.”

Powell indicated that The Fed will not increase rates until the tapering of bond purchases is complete, giving investors a time frame on potential rate increases. With that being said, the broader market needs to consider the ambiguity about a timeline of when rates will rise and real estate investors need to prepare accordingly. GDP rose at a robust 6.4 percent rate and growth is expected to continue at a strong pace in the second half.

“Because jobs numbers haven’t recovered as aggressively as hoped, there’s no immediate sense that interest rates will be raised, but with the economy steadily stabilizing, investors looking to refinance or acquire new property should contemplate acting sooner than later,” said Swerdlow.