Interest rates continue to have a major impact on Commercial Real Estate in 2017. For one, The Federal Reserve raised short-term interest rates for the third time in just six months. The quarter-point move boosted rates to now range between 1% and 1.25%. But in order to build business and propel economic growth, investors and developers in commercial real estate need to understand the trend for increasing interest rates.
Where The Economy Stands
Since the 2017 election, it seems the financial market has been an utter whirlwind. Yet, the economy remained fairly stable during the President’s transition into office. While the economy grew steadily over the last eight years, Deutsche Bank predicts that if this continues, this could become the longest period of economic expansion in history, surpassing the record set from 1991 to 2001.
In May 2017, the unemployment rate reached a 16-year low, hovering around 4.3%. Christopher Macke, the Managing Director of Research and Strategy at American Realty Advisors, believes that what happens with wage and employment growth is more important than another spike in interest rates. A strong economy is best represented by maintained employment growth and wage growth increases. Macke goes on to explain that “whether or not the administration is able to get the significant fiscal policy implemented” is critical for economic growth.
The 10 – Year Treasury Is Still Low
Contrary to what some may believe, The Federal Reserve’s increase in short-term interest rates does not guarantee higher long-term rates. The 10-year Treasury continues to maintain a 2% rank. The 10-year Treasury note is a loan made to the U.S. government. In addition, it is the only U.S. Treasury note that matures in a decade.
The 10-year Treasury note rate represents the yield of return for investing in this note. The yield proves important because it acts as the benchmark that guides other interest rates. Like all other Treasuries, the 10-year Treasury note is sold at an auction. Therefore, the yield indicates the confidence that investors have in economic growth. A low rate on the 10-year Treasury note proves a high demand for it. There is currently a normal yield curve with the 10-year Treasury note, which means that investors predict that the economy will continue to experience a spike in growth.
Decrease In New Commercial Real Estate Deals
Industry experts also notice a decline in the volume of new deals regarding the commercial real estate market. This phenomenon results, in part, due to higher interest rates constraining property deals, thereby by making real estate less affordable. As a result, this creates a divergence in pricing expectations between buyers and sellers.
Should We Expect Interest Rates To Rise?
The Federal Reserve reports that the economy is strong enough for another two to three additional rate hikes before the start of 2108. Since the Federal Reserve meeting in June, interest rates are still projected to move three quarter-percentage-point this year. Overall, the Federal Reserve continues to focus on gradual spikes in interest rates. The economy should remain stable as long as the number of jobs continues to increase while the Federal Reserve continues to take a gradual approach.
The Future of Commercial Real Estate Trends
With the Federal Reserve predicting another interest rate increase before the end of the year, this shows the economy will remain strong and will continue to flourish. The 10-year treasury remaining low indicates that there is still a demand for it and the economy will continue to experience growth. While higher interest rates can lead to a reduced volume of deals in commercial real estate due to an increase in costs, it can also provide an incentive for borrowers and lenders to be more cautious in a bid to reduce risk. When borrowers and lenders act more cautious because there is a risk it reduces the likelihood of causing another financial crisis. Finally, higher interest rates signal a strong economy, which tends to correlate with a strong real estate market.
Looking for expert advisors to explain the ins and outs of the volatile market? The experienced lenders at Hunt Real Estate Capital can help you to navigate the interest rates of loans for your investment property. For more information, contact Hunt Real Estate Capital today!