People involved in the commercial real estate business have been wringing their hands over a possible interest-rate hike by the Fed for about a year.
Well, it’s happening, and a comet is not hitting the earth, contrary to what some might have thought. The rate increase might actually mean good news for commercial real estate.
The Fed is raising interest rates by 25 basis points, and there might be some correlation on how that could impact capitalization rates. But this could probably not be the worst thing to hit the commercial real estate industry.
We’re obviously seeing a major bubble in some markets. San Francisco is out of control, for example, with the escalating apartment rents and soaring office transactions. It has even made Oakland a safe haven for plenty of companies looking for affordable office space.
What the Fed increase is likely to do is correct the boom in commercial real estate that has taken place in the last couple of years. Hessam Nadji, the Marcus & Millichap research expert, said that it is a good sign that the Fed has done this because it means there is more confidence in the U.S. economy.
Long-term lending, which is usually the case in commercial real estate, will likely not be impacted until the end of the year. Additionally, Nadji said that what the Fed did was raise confidence in the overall economic condition, which will boost consumer and business confidence. What it means is that commercial real estate fundamentals, which are already extremely strong, could improve in markets across the country, and not just in gateway cities. This will impact retail, multifamily, industrial, office and other sectors of commercial real estate in a good way, he contended.
However, actual commercial real estate values might not increase as much as in the prior 33 months. Moody’s and RealCapital Analytics both say that transaction values are up more than 17 percent from their high point in 2007. This shows that we might have been hitting a bubble, and a correction could be in order, though a major difference in property values is not anticipated.
What are your thoughts on the slight hike in interest rates and how they could impact CRE values and fundamentals?
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