🥳 Federal Reserve Holds Steady on Rate Hikes

Good morning,

Federal Reserve holds steady on rate hikes; Q3 economic update: unexpected growth; and Brookfield to acquire major assets of Cyxtera amidst bankruptcy proceedings. Let’s delve into today’s topics.

📈 Market Update

🥳 Federal Reserve Holds Steady on Rate Hikes

The Federal Reserve, under Chair Jerome Powell, has signaled a pause in interest rate hikes, leaving rates unchanged at a 22-year high. This decision came after inflation showed signs of cooling down, and Powell emphasized the decline in inflation rather than focusing on the recent economic strength. Despite the past aggressive rate-tightening cycle, the central bank's outlook remains cautious, and they're prepared to adjust rates based on upcoming economic data. Additionally, recent Treasury Department actions and other market dynamics led to a decline in the 10-year Treasury yield.

↪️ The Takeaway:
The relative stability in interest rates can have mixed implications. On one hand, steady rates can encourage borrowing and investment in commercial properties. On the other, the broader economic context, such as cooling inflation and potential slowdowns in other sectors, can influence demand for commercial spaces. The swift rise in the 10-year Treasury yield, which impacts borrowing costs, can also play a role in shaping the future of the commercial real estate market.

📈 Q3 Economic Update Shows Unexpected Growth

The U.S. economy showcased robust growth in the third quarter with real GDP surging by 4.9% annualized, surpassing predictions. Consumer spending played a pivotal role, increasing by 4.0% and contributing significantly to the GDP's rise. While business investments remained subdued, residential construction observed a notable rebound. Despite disruptions in supply chains, especially in the auto sector, inventory build-ups provided a strong boost. Additionally, government investments, spurred by the 2021 Bipartisan Infrastructure Law, continued to bolster the economy. However, concerns emerge as consumers face declining disposable incomes, growing pessimism, and rising debt burdens, hinting at potential spending slowdowns in the near future.

💻️ Brookfield to Acquire Major Assets of Cyxtera Amidst Bankruptcy Proceedings

Brookfield is set to purchase most assets of data center operator Cyxtera Technologies for $775 million, a deal awaiting bankruptcy court's green light. This acquisition, orchestrated via Brookfield Infrastructure Fund III and its partners, comes after Cyxtera, which operates 60 leased data centers globally, filed for Chapter 11 in June due to surging interest rates and inflation affecting lease profitability. As part of the deal, Brookfield will buy the real estate of seven of Cyxtera’s U.S. data centers, facilitating Cyxtera's expansion and control over costs. Nelson Fonseca, CEO of Cyxtera, believes this shift will strengthen their position in the evolving market, especially amidst rising expenditures on data centers by tech giants like Microsoft, Google, and Amazon. Alongside, agreements with Digital Realty Trust, Digital Core REIT, and Cologix are also part of the deal. The hearing for the Brookfield-Cyxtera agreement is scheduled for Nov. 16, with various financial and legal firms advising both parties.

✍️ Further Reading

• Why Net Lease Cap Rates Continue Rising (CPE)

• Newmark Profit Falls As Deal Activity Slows (CS)

• Lower Manhattan Office Leasing Back to Post-Pandemic Levels (GS)

• Zillow CEO Barton Says Company Can ‘Thrive’ in Industry Turmoil (BBG)

• CMBS Delinquency Rate Moves Higher Again in October 2023, Hits New Post-COVID Peak (Trepp)

📊 Chart of The Day