On November 26, the Federal Reserve (FED) announced a new cut in its benchmark interest rate -the second so far this year-, reducing the rate by 25 basis points (bps) to a range of 4.5%-4.75%. This decision responds to a moderation in economic activity: the US labor market is showing signs of cooling, with a slight increase in the unemployment rate, while inflation continues to decelerate, although it remains above the levels desired by the FED.

The goal of the federal agency is to maintain a balance between its two mandates: full employment and price stability. However, the future of monetary policy will depend on how macroeconomic data evolve in the coming months.

Impact on interest rates

Cuts in the monetary policy rate have a direct effect on short-term floating rate loans, such as the Secured Overnight Financing Rate (SOFR), commonly used as a benchmark for construction and consumer loans in the United States. These tend to react quickly to the Fed's decisions, lowering financing costs in the short term.

At the same time, long-term fixed rates - such as Treasury bond or mortgage rates - tend to be more influenced by future economic expectations and do not necessarily react to immediate moves by the Federal Reserve. In fact, over the last 45 days, the 10-year U.S. Treasury rate has risen 80 bps, mainly due to inflation concerns.

Multifamily industry... what does it imply?

The rate reduction announced by the Federal Reserve opens up a range of opportunities for this industry, from refinancing properties to expanding portfolios:

• Increased liquidity. By reducing rates, banks increase their liquidity through lower reserve requirements and better cash flow coverage ratios. cash flow coverage ratios at the balance sheet level. This translates into a greater capacity to grant loans, which boosts the financial market. Along these lines, we expect to see growth in short-term debt transaction volumes over the coming quarters.
• Upward valuations. Lower financing costs push up demand for real estate assets, which in turn increases the price of assets, thereby lowering the cap rates. In this sense, we expect to see a gradual increase in property valuations.

Investment opportunities

The lower rate environment opens a window of opportunity for multifamily investors, among them:

1. Property refinancing.The reduction in short-term rates is particularly beneficial for those investors who hold loans close to maturity. Refinancing these loans allows for lower monthly interest payments, improving the property's cash flow. This frees up capital for strategic reinvestments, such as renovations of existing assets or the acquisition of new properties.
2. Portfolio expansion. The beginning of a rate-cutting cycle marks an excellent time to acquire or develop new rental properties. With valuations still punished - but projected to rise - and the short-term financing costs associated with construction loans falling, it is the perfect time to explore the option of investing in the full range of classic real estate strategies, from core to opportunisticdepending on the investor's appetite and risk aversion.

And the risks?

Although the start of the rate-cutting cycle has generated a sense of relief in the markets, this optimism is not without risks. One of the main challenges remains the volatility of long-term interest rates. Despite the Fed's efforts, the persistence of long-term inflation expectations keeps long rates at elevated levels.

The Fed's goal remains to balance employment with inflation control in order to achieve a "soft landing.soft landing"in the economy. The policymaker is optimistic that the economy will expand healthily in 2025; however, while the probability of a near recession in the U.S. is considered low, many of the current risks are related to geopolitical tensions, the impact of which is unpredictable and could have significant effects on the global economic outlook..

Marco Aurelio Arellano

Real Estate Analyst Fynsa AGF