Fed continues along established stratagem to combat inflation. On May 4 the Federal Reserve raised the Federal Funds rate by 50 basis points in the second of seven planned rate hikes for the year. Now at a target range between 0.75 percent and 1.00 percent, the effective overnight lending rate is expected to climb to the 2 percent to 3 percent zone before the start of 2023 if the Fed continues with this strategy. Numerous forces continue to put upward pressure on inflation. Global supply chains remain disrupted, with significant production shutdowns in China. Labor shortages persist, with only about half as many people looking for work as jobs open, placing upward pressure on wages. The Fed’s actions are a step forward relieving these pressures by raising borrowing costs.

Factors placing pressure on cap rates. Initial yields on commercial real estate compressed substantially over the past decade as investment demand increased. Further cap rate compression is less likely, given tightening monetary policy; however, property yields will likely not adjust in tandem with interest rates. Strong underlying property fundamentals and expectations for above average rent growth will likely keep the attention of many investors, slowing any upward movement. A persistent housing shortage reflects a robust need for dwellings of all kinds, while rescinded health restrictions have lifted foot traffic for retailers and hotels. Supply chain disruptions also continue to underscore the critical roles of many industrial facilities.

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* Historical values through April Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Federal Reserve; Moody’s Analytics; U.S. Census Bureau