Falling rates: A salve for real estate?

How will falling interest rates impact real estate markets?

I think there's not an all clear sign because the market, from a technical perspective, still has a lot of things going on that we're watching very closely. But with rates coming down, that's a huge help. The

Fed has begun a long awaited cutting cycle, potentially providing some relief to rate sensitive sectors. But will commercial real estate be one of them, or will the structural forces that have battered the sector, especially the office sector, continue to dominate? And what does this all mean for housing? I'm Alison Nathan, and this is Goldman Sachs Exchanges. Today, I'm joined by my Goldman Sachs research colleague, Lotfi Karawi, who heads up credit, mortgages and structured products research, and by Jeff Fine, global co head of alternatives capital formation in the firm's asset and wealth ma

for having us. Thanks, Alison.

So, Lottie, let me start with you because when we last sat down on this topic in the spring of 2023, we were really in a very different macroeconomic environment. Interest rates were spiking, inflation was a rising concern, and we were on the heels. If you remember, it was just right after the regional banking crisis that really revolved around the commercial real estate sector, but a lot has changed since then. Inflation fears have obviously subsided. If anything, growth fears are overtaking inflation fears, and rates are on the decline. We obviously had the 50 basis point cut from the Fed th

Absolutely. Look, I think the commercial real estate sector is a growth sensitive and rate sensitive asset class. And on both counts, things are unambiguously better today than they were last time we sat down in March of 2023. On the growth front, the economy is on a solid path towards a soft landing, even though there's been some softening in the labor market and we had a big growth scare late July, early August. And then on the funding cost side, funding costs have come down quite dramatically. I mean, if you look at 10 year yields, just to take that as an example, we peaked at 5% in October

So let's unpack some of that. Firstly, rates are in focus. We just had this big fed cut as I mentioned. So how much of a reprieve could that decline in interest rates, you know, give to the commercial real estate sector? And a lot of it has already been priced in. As you said, 10 years Exactly. Have already come down dramatically. So from here on, is that much of a reprieve to the market?

There's gonna be some relief, but I would say less than generally believed. And the reasons are exactly what you just articulated, which is a lot is already priced in. And so if you look at intermediate long dated yields in the treasury market, they're pricing in a forward path for monetary policy with a terminal value of Fed funds rates around 2 3 quarters, 3%. We think it'll be a little higher than that, around 3 a quarter percent. But even if you take that 2 3 quarters at face value, that is basically telling you that you're there already and that the job of the Fed is essentially to valida

Jeff, let me bring you into the conversation because if I recall correctly, one of the big problems in commercial real estate was the fact that so many loans had been taken out at much lower borrowing costs, and those loans were coming due. So there was this concern about this maturity wall coming and what that would look like. Lotfi just said that with lower rates, some of the floating structures will end up benefiting. But where do we stand with that maturity wall, and, you know, how easy is it for that t