Fed Finally Raises Rates, Response from CRE Industry: ‘No Big Deal’

Article Posted December 17, 2015

Interest Rate Hikes Reflect Expected Strengthening of Economic, Employment Conditions

After seven years of worrying over raising interest rates, discussing the best time to raise interest rates, and debating the impact of raising interest rates, money from the federal government is no longer free.

In a unanimous vote, the board of the Federal Reserve voted to raise interest rates a quarter of a percentage point.

The hike has been anticipated for nearly six months, thanks to a thorough communication strategy from the Fed that all but eliminated the element of surprise for a jittery stock market. The increase became a foregone conclusion following strong employment growth numbers last month.

Additional interest rate hikes are expected going forward, but will come slowly as the Fed continues to take an accommodative stance supporting further improvement in labor market conditions and a return to 2% inflation.

The impact from the decision could also take some time to surface.

"We do not believe today’s move will have any impact on the commercial real estate markets and that the Fed likely has significantly more room to move before we begin to see real pressure on cap rates,” said Spencer Levy, head of research, the Americas for CBRE. “That said, certain markets may be more susceptible than others to interest rate increases.”

The other wild cards Levy said could have a bigger impact than interest rates include the price of oil, an economic crash or 'hard landing' in China, which would lead to pull back in Chinese capital flows, or some other "black swan" event which would impair global growth.

Any such event could easily cause the Fed to reverse course, neutralizing any potential capital outflows, Levy said.

“The flow of international funds-combined with domestic pension funds' large pools of capital allocated to commercial real estate but unspent-will outweigh any potential increase in the cost of capital," he added.

Hans Nordby, managing director of CoStar Portfolio Strategy in Boston, agreed that today’s Fed rate hike should have little or no impact in the near term for private sector commercial real estate investors.

"First, while nominal cap rates are very low versus history, the spread between going-in cap rates and comparable investment vehicles, including bonds, stocks and treasuries, is very high," said Nordby. "Therefore, rates can come up a bit before cap rates need to rise.

"Second, the Fed chose to increase rates because the 'real' economy, most notably job growth, is strong. Strong economies increase demand for real estate, and therefore rents. So, these increased rates are in tandem with higher incomes for the real estate, all else being equal," he added.

"Finally, the fed is unlikely to push rates very hard in near future, given that growth outside the U.S. is very low, and the dollar is very high. Pushing up rates would make American exports even less competitive, just as foreign markets’ demand for U.S. goods is declining."

Jeffrey Rinkov, CEO of Lee & Associates, said he also expects the rate hike will have minimal impact on commercial real estate.

“Based on a strengthening and stabilizing economy, I believe this was a logical move by the Fed,” Rinkov said. “While the Fed is driven by data, I think this signifies its belief that the economy can operate in an environment with a normalizing monitory policy. Relevant to real estate investment, long term interest rates should remain at historical low levels which will continue to incentivize investment.”

By Mark Heschmeyer, December 16, 2015

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Fed Finally Raises Rates, Response from CRE Industry: ‘No Big Deal’