The wait is finally over. Prepare to wait some more.
The Fed recently made the announcement—an event almost as anticipated as the release of a new iPhone—that it is raising interest rates by 0.25%, to a target range between 0.5% and 0.75%.
The commercial real estate industry has awaited this moment for months, though reports so far aren’t showing a major impact on CRE (yet). Indeed, executives have braced for a jump in interest rates for quite some time, while the Mortgage Bankers Association (MBA) has advised borrowers that have not locked in fixed-rate, long-term loans to pay extra attention to fluctuations in rates.
No major impact yet, but more changes to come
At the same time, the Fed’s move will likely not improve fundamentals of commercial real estate across the country. In many cases, investors have taken the rate increase into consideration when assessing a transaction or valuation of an asset. An interest-rate hike is also a sign that the overall economy is improving, meaning that real estate should benefit from strong tenants.
But the actual rate increase isn’t the issue right now. It’s the projection by the Fed, when announcing the hike, that it will also increase rates three more times over the next year. And of course, there is nothing the commercial real estate industry hates more than uncertainty. A year ago, the Fed forecast 4 rate hikes in 2016—and only one actually happened. So far, economists appear skeptical that this will happen, while the markets seem more credulous.
REITs are taking a hit, while speculation continuesNow Morgan Stanley sees REITs as a “cautious” investment, downgrading them from “in-line.” An analyst with the firm said that, on top of the rate increase, REITs have underperformed during the second half of 2016. Commercial real estate fundamentals are reaching their peak, which will then put a drag on revenues.
Worse than that, though, is the uncertainty around when or how much rates will rise again. The last year has been bad enough, with major speculation and forecasting prior to every quarterly Fed meeting, even when rates weren’t moving. Of course, the Fed did little to alleviate this anticipation by repeatedly saying that a rate increase would happen soon, only to turn around and decide to hold steady.
We now face a similar level of ambiguity. Should we believe that the Fed will actually increase rates three times over the next calendar year? Or will they continue to hold like they did before?
Either way, there has already been a sell-off in REIT stocks as a result.
As for the future, who knows? As long as rental and occupancy rates don’t take a dive—and slight rate increases aren’t likely to cause that to happen—commercial real estate should be fine for the foreseeable future. At worst, it might keep more casual investors away from the industry, narrowing funding sources.