We’ll gladly get on board and criticize the Fed for any number of things. Money printing in the months following the initial shock of Covid, not raising rates after the Global Financial Crisis, chickening out late in 2018 during the “Taper Tantrum”…the list goes on. But to suggest that the ills of the banking system and commercial real estate markets are “all their fault”? Well that’s a step too far for us.
Many real estate investment companies were too successful raising capital when real estate valuations were at their peak in 2021. They felt compelled to deploy that capital because of the structure of their products, and they used variable rate debt to fund those purchases because it was the only way that the cap rates would pencil to positive cash flows. Many market participants made those mistakes. Real estate investors assumed rates would never rise, they assumed that rents would never stop growing and worse, they assumed that their underwriting was complete without acknowledging that the world could change!
This is not an attack on these participants. Nearly every investor has made decisions they eventually regret and more often than not, those decisions come at the top of an economic or monetary cycle. But those same investors should not be pointing their fingers at the Fed today. We all benefitted from free money Fed policies for the better part of the last decade. This was an epic economic cycle fueled by loose monetary policy. That obviously had to end some day, and some of us were better prepared for that end than others. Furthermore, some investors missed the whole thing because they were too cautious. This is how these cycles work. But as the old adage goes, pigs get fed, hogs get slaughtered. It’s time we all took our medicine, some responsibility, and start looking for the next opportunities.