By Venture Mortgage Corporation
Unless one is living in absolute isolation, news that the Federal Reserve could raise rates is inescapable. On the heels of reports that the economy and job market are in good condition, characterized as a “solid, moderate path” by Atlanta Fed President Dennis Lochart, a rate hike is all but certain, likely before the end of 2015 or early 2016.
Commercial real estate investors are generally much savvier than the general American public when it comes to financial literacy overall and the implications of a rate hike in particular. Indeed, many of our clients have been shielding themselves, locking into long-term fixed rates with our life company lending partners in anticipation of such an action. In the commercial real estate sphere, some additional considerations in light of this upcoming hike should include:
· If one takes the view that the economy and job market are indeed improving, as the Fed seems to, higher demand for office and industrial space, along with suitable rental housing for those not yet looking to purchase homes, should increase property values and asking prices across the board.
· In the long run, a higher interest rate environment equals a rise in cap rates for commercial real estate, which leads to lowered property valuations. However, well-managed properties will realize increases in NOI, occupancy rates, and rent growth, which should more than outweigh any value declination as a result of higher cap rates. Additionally, well-managed properties classed as “A” or “B” will be in high demand with potential investors, increasing market values and asking prices.
· It is important to keep perspective: the first increase is likely to be between ¼ and ½ percentage points from its current near-zero rate, and Fed Chairwoman Janet Yellen has repeatedly indicated that the plan is to slowly and cautiously raise rates over time. The market will likely overreact to the actual hike, going on to correct itself when cooler (and less excitable) heads prevail. A prudent plan might be to speak with an experienced mortgage banker to explore refinancing of existing commercial real estate mortgages into long-term (10+ years) fixed rates, then wait to see what, if any, action should be taken regarding your investment portfolio. It will surely be much simpler to develop a clear and cohesive plan without the added pressure of the potential impact of a rate hike on your debt service obligations for years to come.
You might also like to read Steve Petersen's perspective on long-term fixed rates as insurance for investors.
Venture Mortgage is a full service commercial mortgage banking firm. We provide a variety of commercial real estate financing for investors and owner occupied properties to facilitate purchases, refinancing, construction, equity, and many other loan programs for multifamily properties, office, retail, industrial, self-storage, specialty/mixed-use, mobile home parks, hotels and more. Feel free to contact us (link) at any time to begin the discussion about financing tailored for your commercial real estate needs.