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Quick Overview

News Brief

In a recent article from JPMorgan, the Federal Reserve's decision to initiate its first rate cut since 2020 marks the beginning of a potential easing cycle that could extend through 2025.

This shift in monetary policy is expected to have far-reaching implications for commercial real estate, particularly in terms of liquidity, borrowing costs, and asset valuations.

Key Takeaways

• Balancing Inflation and Employment: The Fed's priority remains balancing full employment with its 2% inflation target, a challenging task given the current economic landscape. The easing cycle will proceed cautiously, based on incoming data.

• Recession Risks: While a recession remains a possibility, JPMorgan experts believe the labor market is normalizing rather than deteriorating. Severe rate cuts would only occur in the case of a severe economic downturn.

• Impacts on Multifamily Market: As interest rates decrease, liquidity improves, and cash flow coverages increase, it may allow lenders to reduce loan loss reserves. This can lead to more deal flow, rising property prices, and new opportunities for multifamily investors to expand portfolios.

Economic Insight

The Federal Funds Rate (FFR) is the interest rate at which banks lend reserves to each other overnight, serving as a key tool for the Federal Reserve to influence monetary policy.

By adjusting the FFR, the Fed controls short-term borrowing costs, which, in turn, impacts inflation, employment, and overall economic growth. This rate serves as a baseline for other interest rates, influencing everything from mortgages to business loans, making it a crucial factor in the broader economy.

Key Points

• Impact on Borrowing Costs: A reduction in the FFR, like last week’s 50bps cut, lowers borrowing costs across the economy, encouraging more investment and consumer spending.

• Influence on Inflation: By lowering the FFR, the Fed aims to stimulate economic activity, which can increase demand but also carries the risk of pushing inflation higher if not managed carefully.

• Additional Monetary Tools: Besides the FFR, the Fed uses other tools such as open market operations, reserve requirements, and quantitative easing to control liquidity and manage economic stability, especially during times of financial uncertainty.

Essential Knowledge

Upon the sale of a property, it’s important to anticipate the buyer’s tax burden. Local jurisdictions often reassess a property after a sale, which can lead to a significant increase in property taxes, especially in markets with rapidly appreciating values.

This post-sale reassessment can considerably reduce the buyer's Net Operating Income (NOI), affecting the property's overall return profile. Unfortunately, many sponsors overlook this adjustment, leading to inflated financial projections that do not reflect the true cost of ownership, ultimately impacting profitability and exit valuations.

Key Considerations

• Research Local Reassessment Policies: Property tax reassessment rules vary by jurisdiction, making it crucial to understand how the new tax basis will be determined and the potential impact on future tax obligations.

• Timing of Reassessment: In certain locations, reassessments may not be immediate, offering a brief period of lower tax liabilities. Knowing when the reassessment will occur allows for better cash flow planning during the transition period.

• Upfront Financial Modeling: Incorporating the expected tax reassessment into the initial financial model ensures that projected returns more accurately reflect post-sale realities, avoiding misjudged valuations and ensuring informed decision-making.

Newsletter Recommendation

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Mr. Family Office offers invaluable perspectives on these complex organizations, helping Agrippa users better navigate and leverage relationships with these increasingly important Capital Providers.

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About the Author: Blake J. Owens is the Founder & CEO of Agrippa. Previously, he closed over $600 million in transactions as the CIO of a Las Vegas based multifamily developer. Connect with Blake on LinkedIn and X for additional insights on CRE, economics, and more.