Is the End Near?

The Chicago Board of Trade trades federal funds futures contracts. There is an "implied yield" in the contract that fluctuates on a daily or weekly basis. In other words, traders are betting on the future fed funds rate. This market is fully pricing a 25 basis point rate hike at the FOMC's meeting on 12/13, which will bring the fed funds rate to 4.25%, and a 75% chance of another 25 bp rate increase at the meeting on 1/31 -- Greenspan's last. The implied yield on the May 2006 contract closed at 4.61% on 11/25, which suggests the Fed's target rate will be between 4.50% and 4.75% by the middle of next year. Several forecasts have suggested the economy will cool off a bit in the second half of 2006, and interest rates will plateau.

State of the Market

2005 was a year of recovery for the Seattle real estate market. Leasing vacancy rates dropped as the regional economy improved. Investment sales were robust as low interest rates and a lack of product drove investor demand. The coming year will see more of the same in the leasing market. Vacancy should continue to drop and asking rents will rise. The investment market will cool off as interest will continue to rise. Investment inventory will increase as the market will shift away from a seller's to a buyer's market.

Nick Papa
Research Analyst
Grubb & Ellis Company