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Interest rate cut equals more cash flow for real estate

With the Federal Reserve’s recent interest rate cut of 50 basis points, will come on additional real estate cash flow, according to Bill Shanahan, executive director of Cushman & Wakefield Financial Services Group in New York.

For properties operating on a floating rate financing basis, the lowered rate will provide an increase in cash flow. For public real estate companies such as Real Estate Investment Trusts (REITs) the cost for corporate level financing will be reduced, Shanahan said.

The 2% interest rate — the lowest rate since 1961 — could help businesses operate back in the black. This may mean companies will start adding more office space, which would translate into higher occupancy levels, Shanahan explained. "If you can help business make money, that will get occupancies healthy and improve the real estate market," he said.

The U.S. unemployment rate, up to 5.4% in October could also impacted the real estate market as businesses reduced payrolls by 415,000 jobs — the largest cut in 21 years. The actual number was much greater than economists’ original predication of 283,000 layoffs and a 5.1% unemployment rate.

According to a report by Greenwich Capital Markets, "the total number of persons collecting unemployment benefits rose again in the period ended Oct. 20 by more than 50,000. That measure has increased every week since Sept. 11 and the cumulative rise in laid-off workers receiving unemployment checks is approaching 500,000."

The report also reveals that the University of Michigan consumer sentiment measure for early November rose slightly from October, the second straight monthly increase. This was in sharp contrast to the Conference Board index, which plunged almost 30 points since August. Respondent’s assessments of personal finances deteriorated to an eight-year low and expectations for the economic outlook over the next 12 months fell as well. However, longer term expectations (five years) were stable. "I believe that the Conference Board measure is more sensitive to current economic developments and probably better captures consumers’ views about the present and immediate future. Still, it’s encouraging that moods, as measured by the University of Michigan, have held up since the terrorist attacks. The Michigan results do not guarantee anything but are certainly consistent with the widely held view that the economy will turn around relatively quickly, perhaps by the spring of 2002," said author report Steve Stanley.

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