Rising Rates and CRE Health Go Well TogetherBy
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The Fed may begin raising interest rates at its December meeting.
CALABASAS, CA—The question of whether the Federal Reserve decides at its meeting next week to raise its benchmark lending rate will rest upon “a foundation of solid economic trends that will also underpin increased space demand and propel rents in all types of commercial space,”Marcus & Millichap says in a special report. Although commercial real estate owners and investors are wondering what impact an interest rate increase will have on borrowing costs, spreads and asset valuations, “the relationship between rising interest rates, a strong economy and continued vitality in commercial real estate seems quite compatible.”
For one thing, MMI notes that the relationship between the federal funds rate and CRE debt is indirect at most. “Typically, the Fed Funds rate is set to suppress inflationary pressure that accompanies an expanding economy,” according to MMI’s report. CRE lending and valuations are based mainly based on longer-term rates, most commonly the 10-year Treasury, “that do not move in unison with short-term rates.” Not incidentally, the 10-year Treasury remains “well beneath the long-term average.”…
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