Law.com Subscribers SAVE 30%
Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.
Economic Stability Could Lead to Significant Increase In CRE Activity In 2024
Historically, the commercial real estate market has increased or at least maintained its value and overall performance during periods of high inflation. According to a study done by Principal Asset Management, which accounted for notable periods of high inflation throughout history (including the late 1970s and early 1980s), commercial real estate has outperformed inflation 87.7% of the time. Investors in commercial real estate have widely considered the sector to be a long-term hedge against inflation, due to the fact that owners of commercial properties are often able to offset any increases in operating expenses by increasing rents by comparable amounts. The commercial real estate lending market, however, is particularly susceptible to inflation, since, during periods of high inflation, central banks tend to raise interest rates to increase the cost of debt, which, in turn, discourages borrowing and decreases consumer demand. Conversely, when the central banks lower interest rates, the cost of debt becomes cheaper, which results in increased borrowing and higher demand for debt. In the last two years, inflation in the United States has risen to levels not seen since the 1980s. Macroeconomic factors such as supply shortages, geopolitical uncertainty, and low borrowing costs have led to higher commodity costs and inflation. In turn, high inflation has led central banks to continue to increase interest rates, ultimately resulting in high borrowing costs and curbing economic growth.
From 2019 until 2021, particularly in light of the COVID-19 pandemic, the Federal Reserve cut the federal funds rate to generate borrowing and spur economic growth. The federal funds rate sets the range that banks will lend or borrow to each other overnight and directly influences the federal prime rate. The federal prime rate is the rate that banks will customarily charge their most creditworthy customers, and is generally 3% higher than the federal funds rate. During the pandemic, the federal funds rate was near zero. Like other industries, low interest rates stimulated the commercial real estate market significantly, and commercial real estate lending was at an all-time high, with a record $891 billion in loan originations generated in 2021.
However, in an effort to combat high inflation, beginning in March of 2022, the Federal Reserve began rapidly increasing the federal funds rate. Today, the federal funds rate is just over 5% — a massive increase from the near zero rate seen just 18 months ago, and the highest federal funds rate in 16 years. The Federal Reserve rate increases have ranged from 25 basis points to 75 basis points. In March 2023, Federal Reserve Chair Jerome Powell stated that the goal in raising the rates is to bring inflation down to the annual 2% target, implying that the Federal Reserve may continue to increase the federal funds rate until that annual 2% target is met. Over the past year, the total cost of debt is up nearly 300 basis points or 3%. This higher cost of debt has made it increasingly difficult for commercial real estate developers to secure financing within a budget for a particular project, dampening commercial real estate lending and the construction of new developments.
This premium content is locked for Entertainment Law & Finance subscribers only
ENJOY UNLIMITED ACCESS TO THE SINGLE SOURCE OF OBJECTIVE LEGAL ANALYSIS, PRACTICAL INSIGHTS, AND NEWS IN ENTERTAINMENT LAW.
- Stay current on the latest information, rulings, regulations, and trends
- Includes practical, must-have information on copyrights, royalties, AI, and more
- Tap into expert guidance from top entertainment lawyers and experts
Already a have an account? Sign In Now Log In Now
For enterprise-wide or corporate acess, please contact Customer Service at [email protected] or 877-256-2473
How Secure Is the AI System Your Law Firm Is Using?
In a profession where confidentiality is paramount, failing to address AI security concerns could have disastrous consequences. It is vital that law firms and those in related industries ask the right questions about AI security to protect their clients and their reputation.
COVID-19 and Lease Negotiations: Early Termination Provisions
During the COVID-19 pandemic, some tenants were able to negotiate termination agreements with their landlords. But even though a landlord may agree to terminate a lease to regain control of a defaulting tenant's space without costly and lengthy litigation, typically a defaulting tenant that otherwise has no contractual right to terminate its lease will be in a much weaker bargaining position with respect to the conditions for termination.
Pleading Importation: ITC Decisions Highlight Need for Adequate Evidentiary Support
The International Trade Commission is empowered to block the importation into the United States of products that infringe U.S. intellectual property rights, In the past, the ITC generally instituted investigations without questioning the importation allegations in the complaint, however in several recent cases, the ITC declined to institute an investigation as to certain proposed respondents due to inadequate pleading of importation.
The Power of Your Inner Circle: Turning Friends and Social Contacts Into Business Allies
Practical strategies to explore doing business with friends and social contacts in a way that respects relationships and maximizes opportunities.
Authentic Communications Today Increase Success for Value-Driven Clients
As the relationship between in-house and outside counsel continues to evolve, lawyers must continue to foster a client-first mindset, offer business-focused solutions, and embrace technology that helps deliver work faster and more efficiently.