At the end of 2017, the Federal Open Market Committee raised the federal funds rate 25 basis points to a target range of 1.25% to 1.50% and plan for three more hikes in the next coming years. If you do not already know this, the federal funds rate is the interest rate at which banks lend funds to each other for overnight loans and is highly influential in impacting interest rates for real estate. So what does this mean for my commercial real estate portfolio?
What the Future Holds:
The Economy had a fantastic year in 2017 and a raising rate environment should not affect commercial real estate stakeholders as much as sentiment rings. Although CRE investors are naturally fearful of this type of rising rate environment especially with 3 rate hikes projected for 2018, the difference in the current environment that should leave CRE industry more positive is the how the FOMC is going about controlling the hikes.
The Feds cautious rather than rash decisions to raise rates this past December should give the commercial real estate industry comfort rather than angst. Job growth, higher wages, and on target inflation through 2017 suggest that economic recovery in the United States has become steady without the need for forcefully low interest rates.
This environment can actually negate the risk of over supply by pushing borrowers to be more continues when seeking to finance new construction. Although increasing rising rate environment may mean the less property can you can buy, cash flow for commercial real estate will be more stable due to higher rents and higher sales prices.
Playing Devils Advocate about Rising Rate Environment:
On the flip side, the 10-year Treasury rate has been fairly stable specifying that the market may not be convinced that the FOMC will be implementing significant rising rate environment hikes in the near term. If there are no significant rake hikes in 2018, the cost of borrowing will continue to be low and the value of properties are expected to stay stable. This proves that no matter the what type of rate environment you are in, your commercial real estate portfolio can win.
How to Succeed:
The key to succeeding in this type of environment is to focus on long-term, be vigilant of drivers of rising rate environment hikes and to be very narrow-minded in the markets that are being invested. Focus on the value of properties and leave room to be able to purchase properties that are over-levered during the downturn to reap the benefits from the natural real estate cycle.
Crushing Commercial Real Estate in 2018:
No matter the interest rate environment, you can count on VT Aerial Media to kick off the new year with some awesome video content for your Commerical real estate portfolio. Give us a shout and lets partner up!