The Fed, Interest Rate And Good News For Commercial Immobilien!
At its April 27–28 policy meeting, the Federal Open Market Committee reiterated its commitment to maintaining low rates until the economy recovered more fully from the pandemic. However, the rates are at historical lower levels and certainly will rise as the economy returns to pre-pandemic levels. Some observers expressed concern about the impact on commercial and residential real estate markets of higher rates. However, most evidence suggests that the price environment remains favorable for the property. Adhunter
Most people know the effects of interest rates on housing markets. Lower home mortgage rates reduce the cost of financing home purchases and often spur home purchases, new buildings, and house prices to rise. We are in the midst of a housing boom, which is largely driven by current low mortgage rates. Of course, this process can work in the same way and higher mortgage rates usually slow down home purchases and cool down the housing market.
In commercial real estate, the same forces are working, as properties are often financed by commercial mortgages. As a result, commercial real estate markets are often viewed as one of the most interest-rate-prone sectors of the economy. The current risks are not large compared to previous periods, however, because debt loads are more moderate than in the past in many real estate sectors.
The two main factors in the long-term interest price outlook (which most directly affect commercial real estate markets) are economic growth and the chance that such growth will increase inflation. Economic activity is expected to rebound over the spring and summer, as the deployment of vaccines will slow the spread of Covid-19 so that firms and consumers can start to recover to normal prepandemics. For the rest of this year, many economists expect the economy to grow at a 6% or faster annual rate. In that faster growth generates increased inflation, higher business activity and demand for commercial spaces, higher occupancy rates, higher commercial property earnings and higher property valuations are also generated. These higher earnings usually compensate for any drag from rising interest rates in times when growth accelerates.
Indeed, inflation is likely to increase as growth accelerates. Concerns about inflation risks first began to emerge as Congress discussed the $1.9 trillion package for fiscal stimulus in February. Former Secretary of the Treasury, Lawrence Summers, warned that the scale of this stimulus can push the economy beyond its potential and fuel inflation.
This stronger growth environment has been met by the financial markets and long-term interest rates have already started to increase. The 10-year Treasury bill yield rose from just over 1% at the end of January to 1,75% at the end of March.
But, for a number of reasons, commercial immobilizations, including macroeconomic factors, economic policies and financial conditions in commercial real estate markets, are likely to be resilient. Let’s take a look at the key factors.
We’re in a world of low inflation, low returns and low interests
It’s not the ’70s show or even the ’60s when it comes to inflation risks. There is no consensus that the upcoming growth pick-up will drive inflation too high. Indeed, many economists (including myself) expect inflation to remain moderate. There are cyclical, structural and political reasons why inflation prospects are good:
Cyclic factors are temporary
Due to basic effects, inflation will increase in the next 12 months. This is because price comparison against year-ago will be based on the first few months of the pandemic, when during the shutdowns prices were temporarily depressed by unusual weakness. This will give the reported 12 month inflation an artificial boost, but this high inflation rate is not the beginning of an inflationary spiral.
More importantly, overheating in the 1960s and 1970s was the result of years and years when the economy was pushed over potential GDP — the “speed limit” for the economy. The fiscal boost from the expenditure in Vietnam, Joseph Gagnon of the Peterson Institute of International Economics pointed out for a long time, extending for many years, while many parts of today’s fiscal stimulus are a temporary response to the current economic crisis. As these stimulus components decrease in the years to come, inflation pressures do so.