Today’s post is written by Michael Green, Senior Commercial Loan Originator with Counsel Mortgage Group, LLC.  Mike writes monthly on the commercial mortgage market.  Check back each month for his commentary.  

Only 4 weeks out from the presidential election the CRE market is already anticipating changes that may come with the new administration. The Republican sweep of the Executive branch and both houses of Congress is expected to substantially impact both the number of policy changes and the size of those changes.

 Plodding through the numerous cabinet nominations and ambassadorships, and the theatre created by the counter-party responses to these, we can identify 3 policy points likely to impact CRE. 

·        renewal of the 2017 Tax Cuts and Jobs Act.

·        implementation of broad-based trade tariffs.

·        changes in immigration policies and the deportation of illegal immigrants. 

Economists cite the inflationary potential of these particularly proposed policies.  Both tariffs and reduced immigration, let alone deportations, may re-ignite inflation. Many of the new tax policies proposed by President-elect Trump, as well as extending the 2017 Tax Cuts and Jobs Act, would likely result in an increased federal deficit. Increasing the deficit would then likely require increased issuance of Treasuries, which in turn could put upward pressure on interest rates. 

The extreme uncertainty of the current environment has most investors paused pending clarification from the new Administration in January.  We expect a relatively fast ramp-up of activity in Q1-25, since many of the uncertainties will be cleared in the politically-critical first 100 days after inauguration.  

As for interest rates, the Fed will be digesting Q4-24 data which includes 4-5 weeks of Christmas shopping.  Early indications from Black Friday are that the consumer remains “active” – sales up 12% vs. 2023.  If the consumer/economy remains expansive as seems the case, the Fed will be in no hurry to reduce interest rates further.  According to FedWatch, the probability of the overnight rate dropping to 3.5% or lower by June 2025 has dropped from 68% to 15% over the past month. It is now a widely held belief that interest rates will not fall as far or as fast as most investors were anticipating. 

Point of perspective:  The SBA 504 rate at the November auction was 6.28% fixed for 25 yrs. The Prime rate is 7.75%, pending possible adjustment from the Fed’s December FOMC meeting Dec. 17-18.  The current 10-year Treasury rate is 4.25%.

Away from the political impact, the long-term fundamentals for most types of CRE remain sound.