Interest rate increaseOVERVIEW:  Experts from CBRE Group, Inc. are reporting interest rate increase swamps fundamentals in most markets and have released a response that details the expected impact on certain US markets.

The Fed coupled its first rate hike in nine years with a signal that further increases will likely be made slowly as the economy strengthens further and inflation rises from undesirably low levels.

The central bank said in a statement after its latest meeting that it was lifting its key rate by a quarter-point to a range of 0.25 per cent to 0.5 per cent. Its move ends an extraordinary seven-year period of near-zero borrowing rates. Market mostly priced in this result, so near-term volatility is muted.

Global factors including China and oil prices could slow path of rate rise.

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. That said, certain markets may be more susceptible than others to interest rate increases as noted in our piece from early September: Identifying market risk for cap rate increase under Fed tightening​. Our estimate of markets that may be more affected than others include the following:

  • Overall impact to commercial real estate markets
  • Specific US markets more impacted than others
  • Flow of international and domestic funds to commercial real estate
    Expectations for 2016, and wildcards that may cause the Fed to reverse course (China, oil prices, etc.)

Spencer Levy, CBRE Head of Research, The Americas said, “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. That said, certain markets may be more susceptible than others to interest rate increases.”

“The flow of international funds—combined with domestic pension funds’ large pools of capital allocated to commercial real estate but unspent — will outweigh any potential increase in the cost of capital. 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. But even this type of event could easily cause the Fed to reverse course, neutralizing any potential capital outflows.”

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