The Federal Reserve is saying that it will start to taper off its purchases of $120 billion of bonds per month. Also, Fed officials were split 50-50 on an interest rate hike in 2022 according to Oxford Economics, calling the meeting “slightly more hawkish.”
But what does that mean for commercial real estate? One of those good and bad news scenarios.
“The tapering of bond purchases could result in a selloff of Treasuries,” David Pascale, senior vice president at George Smith Partners, tells GlobeSt.com. “This could increase interest rates for virtually all CRE permanent loans, which are typically priced over the 10-Year Treasury. Higher rates could lead to higher cap rates and therefore lower values for CRE assets nationwide.”
“It is assumed that tapering will boost the ten-year rate, as the Fed will stop buying so many treasuries,” Robert Frick, corporate economist at Navy Federal Credit Union, says. “But that is probably a weak correlation at this point. So, mortgage rates are not likely to rise given the ten-year is not likely to rise much from tapering.”
But the “Fed controls short-term rates, which affects construction loans,” Andrew Twito, vice president of capital markets at Ryan Companies, tells GlobeSt.com. “It might become a little more expensive to borrow to build what we’re building. But there’s still a good spread between the 10-year and a 5 cap. Historically, people look at the spread. Right not it’s not as low as it has been. Based on that, it looks like there’s still a bit of runway on pricing.”
Which is a good thing, especially if you’re building. If construction loan rates rise, Juan Segarra, president and CEO of Foresight Construction Group, predicts a potential “breaking point.”
“Depending on the market we’re talking about, developers will start to reconsider their options in terms of investments,” Segarra says. “I question whether there’s enough demand and money in the market period and, if interest rates go up, whether it will have a major effect on whether people will invest.”
However, there are sectors like industrial, multifamily, and medical office that have been resilient and driving both higher values and rents, as Sundip Patel, CEO of Avana-EqualSeat, points out. They could act as a buffer to the industry with continuing demand because consumers will continue to want goods delivered, someplace to live, and a doctor to visit when ill.