Investors in commercial real estate and multifamily housing should be less concerned about the Federal Funds rate and more focused on the potential scarcity of capital in the debt markets going forward.

Given the consistent 40-year drop-in mortgage interest rates from 18 percent in 1981 to under 3% in 2021, I think we’ve all forgotten the many potential drivers of these rates. For all the deserved attention on the Federal Funds rate, it seems that many have overlooked an important principle: the Federal Funds rate does not directly impact mortgage rates. Instead, its influence is felt heavily in Treasury bonds, usually 10-year Treasuries, which have historically been a significant determinant of mortgage rates. But not the only one. Factors like GDP, unemployment, housing demand, and inflation also weigh heavily on mortgage rates and often without a direct relationship to the Fed Fund rate or Treasury Bond yields.

Others in the CRE community, however, disagree with CBRE’s prognosis. The CRE capital markets have many well known issues that will make borrowing difficult in the year ahead, these experts say.

“The lending market is far from stable,” David Frosh, CEO of Fidelity Bancorp Funding, tells GlobeSt.com even though interest rates have stabilized. “The 3% to 4% loans coming due total more than $1 trillion. New financing will most likely be in the high 5% to mid-6% range and loan-to-values (LTV) will be lower.

“These loans are upside down and it is going to create a huge problem for banks and investors.”

Please join us for a private interactive webinar for Fidelity friends and investors as we host our friend John Silvia, President of Dynamic Economic Strategy and former Chief Economist of Wells Fargo. You may recognize John from his regular appearances on CNBC, CNN, BNN, Fox Business News, The Wall Street Journal, Financial Times, and other publications.

Join us at the Winter Forum on Real Estate Opportunity & Private Fund Investing next week. Charlie Woo, President, is featured on a fantastic first panel, "Interest Rates, Inflation & Bank Activity: Macroeconomic Factors Impacting CRE". Get there early on day one and reach out if you are attending!

Throughout 2023, economists and stock market analysts found themselves notably off the mark in their predictions, surpassing even their usual dismal results. Contrary to expectations, economic growth has exceeded the vast majority of projections. Amazingly a significant uptick in interest rates was met by continued growth in national housing prices. No one predicted this.

I had the good fortune of being taught by Peter Drucker while getting my MBA at Claremont University. One evening, Drucker quipped that he had been a journalist, mathematician, investment banker, economist, and a few other things before settling on writing, consulting and teaching.

He said the job he most disliked was being an economist.

The reason, he stated, was because economists were rarely right. They could tell you what happened but could almost never forecast what was going to happen. It seems I could have been a terrific economist – as I have incorrectly believed inflation and a recession were right around the corner for the past five years!