M&M: Interest Rate Increase Will Not Harm CRE

The same positive economic trends moving the Federal Reserve toward increasing interest rates are lifting commercial real estate performance, reported Marcus & Millichap, Calabasas, Calif.

M&M released a special real estate capital markets report saying that positive economic trends support performance gains for all major commercial real estate property types. The real estate services firm expects these trends to continue even if interest rates increase.

Hessam Nadji, senior executive vice president with Marcus & Millichap, said he expects that the Fed will begin its “normalization” of interest rates in 2015 or 2016 because expanding payrolls and retail sales growth support the economic expansion. In a recent CNBC interview, Nadji said an interest-rate increase “has been baked into the market, certainly in the commercial real estate investment market as well as on the consumer side.” He added that investors currently sitting on the sidelines will likely begin to jump back into both the residential and commercial property marketplace once interest rates start to move.

The report also pointed to limited new construction in most commercial property sectors and an overall balance between new building and renter demand in the apartment sector.

Some analysts say an increase in the short-term Federal Funds rate could harm commercial real estate asset values and sales activity. But William Hughes, senior vice president with Marcus & Millichap Capital Corp., said not to worry. “As the markets prepare to digest a rate increase by the Federal Reserve, it is important to stress that long-term rates such as the 10-year Treasury are not directly tied to short-term rates [such as the Federal Funds rate], or the short end of the yield curve,” he noted.  

Hughes said readily available capital and a wide range of active lenders will keep interest rates “competitive” in the coming months, and he does not expect the timing of the Fed action to have a negative impact on commercial real estate lending.

The 10-year U.S. Treasury ended the third quarter in the low two percent range, held down by rising demand for low-risk, fixed-income assets, Hughes said.