Higher Interest Rates & CRE Impacts

With the Federal Reserve approving the second 2017 increase of the Federal Funds rate today by .25% to 1.25% we are taking a closer look at how this will effect the economy and commercial real estate markets.

• Prime Rate will increase from 4.00% to 4.25% – Prime is generally 3% higher than the Federal Funds Rate – For any Prime based loans (Construction, Credit Cards, Auto Loans, etc.) you can expect your borrowing costs to increase by .25%
• It is widely expected that the rate may be increased again at least twice during the remaining Federal Reserve meetings this year
• Immediate impacts on long term rates appear minimal for the time being as 10 year treasury rates today reached calendar year lows.
• However, the Fed is signaling an intention to start shedding assets, including treasuries, acquired during their quantitative easing program from their balance sheet in the coming months and the change may cause some disruptions to medium and long term rates.
• Overall, a rise in interest rates signals a healthier United States economy, which leads to more activity for commercial real estate investors.
• In a rising interest rate environment it is a borrower’s best interest to lock in longer term, fixed rate debt. Life companies provide just that.

While interest rates may drive up cap rates, the fact that rates are rising signals that investors are willing to invest at today’s prices. However, with less of a need for big box retail and tenants shrinking their footprint across the CRE spectrum, we may see a downward trend in lease rates, calling for a higher cap rate.

Whether cap rates go up or not on the short term, they will on the long term. A more disciplined approach is required in making your financing decisions in a rising interest rate market. Our life companies are looking for long term, moderately leveraged, quality assets to help create a permanent relationship with investors. They are the stable and dependable lenders of choice.