M&M: CRE Can Survive a Rate Increase
Many analysts expressed surprise when the Federal Reserve decided not to raise interest rates on Sept. 17. But commercial real estate could weather a rate increase, said Marcus & Millichap’s William Hughes.
“We frankly heard so much about it that expectations had clearly been that they were going to push rates up. They have given us guidance that they are going to be half what they thought they were even eight months ago,” Hughes said. “Really, 25 basis points on the short end of the yield curve really would not have affected real estate. That really pertains more to commercial debt on that end of the yield curve as opposed to the longer end which is where we’re typically borrowing at. So the impact should have been–would have been–nominal.”
Hughes, senior vice president with Marcus & Millichap Capital Corp., spoke at a company webinar last week.
The Commerce Department revised its estimate of second-quarter U.S. GDP growth on Friday to 3.9 percent from its initial estimate of 3.7 percent, and Hughes said the U.S. economy remains strong overall. “I think at this point we are now looking at a December decision [to raise interest rates]. At this point it’s baked in to what we are doing and where we are with long-term rates. I think the bigger issue for us is that long-term rates are really tied to inflation. The value of bonds comes down as inflation goes up. But with very little pressure on inflation we don’t see for some period of time rates running away from us.”
Most observers anticipate a roughly 25-basis-point increase when the Fed raises rates, Hughes said. “The Fed needs to do something now. It’s been so low for so long it’s scary. Obviously they’ve been very accommodative and they’ll continue to be very accommodative.”
Hughes cited “unknown risk” in the marketplace. “That’s the problem,” he said. “We don’t know what’s going to happen six months from now. While I might suggest that interest rates will remain relatively range-bound, that will they stay pretty close to where they are now and there is plenty of capital, there is risk and that risk can come from so many different areas because we operate on a global perspective.” He listed potential risks ranging from China’s recent economic challenges to domestic inflation to U.S. dollar valuation changes.
“So many things can happen that would change where we are today,” Hughes said. “What I would suggest to you is there is certainly always more risk in rates moving up quicker than they are going to come down, so if you can move in the marketplace and you can hit that bogey [benchmark] that you’re trying to reach in terms of cash-on-cash return, then you should move into the marketplace.”
