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Fed rate hike to have ‘no impact’ on CRE, experts say

The much anticipated increase by 0.25 percentage points to a range of 0.25 to 0.5 percent will have no impact on commercial real estate, according to industry experts.

The much anticipated Fed rate increase is upon us, ending a seven-year period of short-term rates held near zero.

Well, so what. The increase by 0.25 percentage points to a range of 0.25 to 0.5 percent will have no impact on commercial real estate, according to industry experts. 

“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 Americas research at CBRE.

Levy noted that the flow of international funds combined with domestic pension funds’ large pools of capital will outweigh any potential increase in the cost of capital.

Dekel Capital founder and managing principal Shlomi Ronen was similarly unmoved by the Fed action, noting that there were “no big surprises” today.

“This rate hike is a non-event for the capital markets as they have already priced in the rate increase,” Ronen said.

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Yellen

The Fed cited job growth and steady economic expansion as backing for its decision. The Fed expects the new rate to come in around .375 percent before the next hike.

“[We recognize] the considerable progress that has been made toward restoring jobs, raising incomes and easing the economic hardships that have been endured by millions of ordinary Americans,” Fed chairwoman Janet Yellen reportedly said at a news conference following the decision.

Using reference cap cap rates generated from historical CMBS issuance to assess the impacts of the rate increase, Standard & Poor’s developed a cap rate simulation over a 10-year period showing that “cap rates could, on occasion, touch [S&P’s] cap rates that are anticipated in a ‘B’ economic stress.”

“In those cases where the cap rates are projected to be 8%-9%, the inflation rate would be about 4% and rents would be growing, so values may not necessarily be down,” the agency stated in a report. 

“More worrisome may actually be the lower-rate scenarios, as our analysis suggests that in a low-rate environment, cap rates won’t drop one for one, while rents could decrease substantially.”

The rate moved to zero exactly seven years ago, on December 16, 2008. After today’s hike, subsequent increases will be rolled out slowly, according to the Fed.

But it may take much more than that to move the real estate markets.

“The wildcards here include the price of oil, an economic 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,” Levy said.

“But even this type of event could easily cause the Fed to reverse course, neutralizing any potential capital outflows.”

 

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