Fed Decision: ‘No One Got Caught Off Guard’

The Federal Reserve’s decision to raise its benchmark interest rate by a quarter percentage point will have little effect on commercial real estate, analysts said.

“The Fed’s move is an outcome of steady economic growth and of expectations that growth will continue,” said MBA Vice President of Commercial Real Estate Research Jamie Woodwell. “Given how widely anticipated the move has been, it is unlikely to have much of a near-term impact on commercial real estate fundamentals–long-term rates remain low, property values and operating conditions are strong and transaction values are running at a brisk pace.” 

Ernie Katai, executive vice president and head of production at Berkadia, New York, agreed that the Fed “telegraphed” the move in advance, “so everyone was waiting for them to do it,” he said. “No one got caught off guard.” 

Katai called the move the Fed’s first signal that it has confidence in the economic recovery. In addition, Katai noted that CRE market fundamentals remain very strong. “This year was a record year,” he said. “Looking into a crystal ball, it’s critically important to note that we still see a prevalent amount of equity available, and as long as that stays in play I still expect we’ll see a relatively robust real estate market in 2016.” 

Spencer Levy, Americas head of research with CBRE, said he does not believe the Fed’s move will have any impact on commercial real estate markets and that the Fed likely has “significantly” more room to move. “That said, certain markets may be more susceptible than others to interest rate increases,” he noted. 

“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,” Levy said. “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 Levy said the Fed could easily reverse course to neutralize any potential capital outflows should any serious event occur.

Woodwell said MBA forecasts a slow rise in longer-term interest rates, which could put upward pressure on cap rates and borrowing costs. “From a mortgage perspective, as we move forward, it will be important to monitor the Fed’s plans with respect to their balance sheet investment in Treasuries and mortgage-backed securities and how those decisions affect longer-term rates,” he said.