It came as little surprise that the Fed boosted its target rate for the federal funds rate by ¼ to ½ percent this past week. In a release dated March 16, 2022, the Fed pointed to elevated inflation, “reflecting supply and demand imbalances related to the pandemic,” along with increasing energy prices. Then there were concerns indicated by Russia’s invasion of Ukraine.
And, as has happened in previous periods of rate hikes, questions focuses on how this might impact commercial real estate financing and performance. Some analysis is already out there in connection with this activity, with more likely to be introduced in coming weeks.
Even before the rate hike became reality, the Finance Lobby took care to point out that “the Fed raising interest rates are never the only factor affecting the CRE market.”
However, experts with the organization did suggest paying attention to the following:
Potential slowdown in refinancing
Continued high costs for labor and materials
Possible cap rate increases
The Finance Lobby also pointed out that some CRE sectors (think multifamily and industrial) will do well no matter the fed funds interest rate. Interestingly enough, the company also forecasts a growth in the brick-and-mortar business segment, pointing out the “continuing need for customer fulfillment centers and smaller retail outlets.
Cushman & Wakefield added another perspective, namely that an increase in the federal funds rate will “ultimately benefit the long-term health of the property markets.” This is because raising the funds to curb inflation could lead to price stability and a “sustainable healthy labor market.” The result? “The confluence of these two objectives being achieved will help to sustain the CRE expansion,” according to Rebecca Rockey, who is Cushman’s U.S. Head of Economic Analysis and Forecasting.
Rockey pointed out other considerations, such as:
Current interest rates remain low, though floating-rate debt will become pricier
Anticipated GDP growth of 3% means more demand for all property types and improving fundamentals
In anticipation of rate increases, the financial market priced in rate hikes throughout 2022
She also pointed out that “the love affair between interest rates and cap rates has been anything but straightforward over the years,” with no correlation between federal funds rate changes, the 10-year Treasury rate and cap rates. But when spread are narrower and interest rates change, cap rates could increase.
Also increasing? Risk aversion. As such, “CRE debt and equity pricing are likely to come under pressure with this being felt unevenly across sectors and geographies depending on the willingness of investors to accept smaller risk premia,” Rockey said.
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