REAL ESTATE NEWS

The Federal Reserve left interest rates unchanged in the 3.5% to 3.75% range, emphasizing that economic activity continues to expand at a solid pace while inflation remains elevated.

Chair Jerome Powell noted that job gains are low but stable, and the unemployment rate has shown little movement. The Committee reiterated its commitment to achieving maximum employment and returning inflation to 2%.

Powell acknowledged that progress on inflation has been slower than hoped, though the Fed still anticipates one rate cut later in 2026.

Commercial real estate industry professionals said the decision would create volatile construction costs, delay construction projects, and compress cap rates later this year, and that office and retail sector transactions will see reduced velocity.

Paul Rahimian, CEO at Parkview Financial, told GlobeSt.com that he is monitoring a "stagflationary" environment.

"Heightened geopolitical risks – specifically the conflict in Iran and the closure of the Strait of Hormuz – threaten to re-ignite supply-side inflation," Rahimian said.

"For California developers, this translates into volatile construction and input costs, which may further stall the delivery of much-needed housing supply."

Despite broader economic concerns about lower GDP, consumer spending, declining job numbers, and inflation, markets like the San Francisco office are benefiting from AI-driven capex, providing a floor for office and residential rents, he said.

Additionally, high home prices continue to drive "renters by necessity."

"Cap rate compression is expected later in 2026 with potential rate cuts," according to Rahimian.

"There's not likely to be any change to interest rates while Powell stays as chair, but things may change when Warsh likely takes over the Fed in May with a bent more towards cutting rates to stave off economic contraction."

The 'Great Pause" Continues

Ed Del Beccaro, EVP, San Francisco Bay Area Regional Manager of TRI Commercial Real Estate/CORFAC International, told GlobeSt.com that the FOMC decision today will continue the "great pause."

This, combined with tariff uncertainty and the yet-to-be-seen inflationary effects of the war and the oil-price shock, will cause developers across all categories to delay construction of new projects.

"This is especially true in California, where new construction starts will be minimal except in a few cases of medical or tech build-to-suit," Del Beccaro said.

"The office market is already in a deep depression with more negative absorption and higher vacancies forecasted. This will result in more office building foreclosures and loan restructuring throughout California."

Ironically, Del Beccaro said, AI will cause more layoffs statewide in the tech and general office sectors, while the AI companies themselves are leasing more space in Downtown San Francisco.

"Statewide multifamily residential values will stay flat, with new construction starts minimal," he said. "San Francisco will be the exception again as young people continue to come in droves to the city for the new AI jobs, causing multifamily rents to rise to levels that are amongst the highest in the country."

A forecast from the Fed of "maybe future small interest rate cuts in the future, depending upon various factors, tells California real estate investors and developers that, at best, the CRE market stays the same and could decline due to limited growth in the employment sector and other areas.

"CRE in California will be adversely affected as the velocity of monthly completed commercial transactions in the office and retail sectors will continue to be slow, keeping vacancies high, resulting in more foreclosures."

Source: GlobeSt/ALM