As the Fed turns…. what happens next?

By Jim West, broker

There have a been an increasing number of articles and blogs posts  written , and discussions being had about what effects rising interest rates will have on commercial real estate.   The Federal Reserve has certainly remained steadfast in their policy of keeping rates low to promote economic activity.

It has paid dividends as the economy continues to keep a moderate pace (not strong, or accelerating) of growth.  What happens next?   Will it have a major impact on the CRE industry?

The industry has certainly thrived the past four or five years.  Here is a link to the National Real Estate Investment Trust page.    I’ve selected  the Western region so you can see how this section of the country has been faring.  Totaled  between income and appreciation holders of REITs  have done  well.

Keep in mind there are always time lags before we see reults of changes in policies.   In the early stages of Fed tightening, the momentum of a stronger economy dominates, and we’ll still see vacancy rates in office, retail and industrial sectors continue to fall, and rents will increase, boosting earnings.  This will bode well for building owners.

Economists Alan Beauleau who runs ITR says to look for a rate increase of close to 400 basis points or slightly under one half a per cent.

Ted Jones who is the corporate economist for Stewart Title sees a similar scenario, in his recent post September 12th, although he has concerns that job growth has slowed, and the Fed may have to delay their planned increases.

William Conerly in his article in Forbes magazine this past June makes the case  that longer term commercial lending rates are more tied to bond yields and thus may get pushed up in spite of Fed actions.

Either way Commercial investors should be fine for the first and second year of Fed tightening, with the caveat that if the Fed rate increases put a drag on the economy, there could definitely be more sluggish returns on the horizon within a two year window.