Fed Rate Hike and Commercial Real Estate: Not to Worry
Yesterday, the Federal Reserve raised a benchmark interest rate by a quarter of a percent, the first interest-rate hike since 2006.
What will the impact be on United States commercial real estate markets?
None, for now, is the answer provided by CBRE Group, Inc., the world’s largest commercial real estate services and investment firm.
“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, the firm’s head of research for the Americas. “That said, certain markets may be more susceptible than others to interest rate increases.”
The Fed’s rate hike was hardly unexpected, Levy noted, and represents a step toward conventional monetary policy. CBRE expects baby-step rate hikes to continue through next year, but “the Fed will only do so in a U.S. economy that continues to improve. The beauty of Janet Yellen’s data-dependent credo is that it allows the Fed to adapt to ebbs and flows in the economy.”
In addition, the flow of international funds will outweigh any potential increase in the cost of capital, according to Levy. “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,” he said. “But even this type of event could easily cause the Fed to reverse course, neutralizing any potential capital outflows.
“The bottom line is that the Fed is raising rates because the domestic economy is doing well,” Levy concluded. “Things may get tricky as the expansionary cycle runs its course and interest rates near equilibrium, but that’s still a few years away. So for now, sit back and watch the data.”