With the economy on solid ground and remarkable recovery from the Great Recession, it’s no surprise that the Fed has tightened monetary policy over the last year.
At its September meeting, the Federal Reserve raised interest rates for the third time this year, bringing them to 2.18 percent.
Even though rising interest rates tend to dampen the commercial real estate market, we’ve seen little impact on real estate values and capital availability in the last year.
The Fed has been careful not to raise interest rates too dramatically. Despite the increases, the market remains historically low, and commercial real estate values appear to be stable.
Several factors, including cap rate, spread over the US 10-year Treasury yield, and the outlook for economic growth and real estate market fundamentals, may help to protect commercial real estate performance.
If interest rates rise due to stronger economic growth, as is currently the case, real estate demand will likely rise as well. The economic recovery has significantly reduced vacancy across all major property types, while construction in balance with demand has resulted in significant rental rate growth.
Concerns about rising inflation in the United States have been alleviated in recent weeks, with the consumer price index rising 0.3 percent in October and the core CPI coming in lower than the previous reading of 2.2 percent.
These figures come as a relief to investors who have been concerned about rising interest rates. Investors are concerned that rising inflation will force the Fed to tighten policy faster than expected.
While interest rate hikes are expected to continue, they will likely be phased in, with five increases planned between now and 2020.
The expected increase in retail/consumer spending this holiday season, historically low unemployment, and rising wage growth are all signs of the economy’s strength, evidenced by 3.5 percent third-quarter GDP growth. It’s a sign that the Fed will continue to normalize.
This year, the Fed has been open about raising interest rates. There’s no reason to expect that to change in the next four quarters, allowing investors and developers to adjust their projections to account for future changes.
And while rising borrowing costs make lending more difficult, they appear to be offset by a thriving economy and relaxed banking rules.
Lenders are priced low enough to remain appealing while not affecting transaction velocity or lender allocations. Capital availability should remain high in the coming months.
As we enter 2019, economic strength, long-term capital pricing, consistent NOI growth, and property values should help the commercial real estate market remain strong.
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