What will be impact of interest rate increase on CRE?
In a move that heralds modestly higher rates on some loans, The Federal Reserve is raising interest rates from record lows set at the depths of the financial crisis.
The Fed coupled its first rate hike in nine years with a signal that further increases will likely be made slowly as the economy strengthens further and inflation rises from undesirably low levels.
Wednesday’s action signaled the central bank’s belief that the economy has finally regained enough strength 6½ years after the Great Recession ended to withstand modestly higher borrowing rates.
“The Fed’s decision today reflects our confidence in the U.S. economy,” Chair Janet Yellen said at a news conference.
The Fed said in a statement after its latest meeting that it was lifting its key rate by a quarter-point to a range of 0.25 percent to 0.5 percent. Its move ends an extraordinary seven-year period of near-zero borrowing rates. But the Fed’s statement suggested that rates would remain historically low well into the future, saying it expects “only gradual increases.”
So what will be the impact on the commercial real estate industry? Experts from CBRE 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. That said, certain markets may be more susceptible than others to interest rate increases.
CBRE officials went on to say 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. 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. But even this type of event could easily cause the Fed to reverse course, neutralizing any potential capital outflows.