The Federal Reserve has made its intentions clear as it plans to raise short-term borrowing rates. The question remains as to whether it will stay that course in the second half of the year, and whether long-term rates will follow suit.
At this stage of the cycle, it seems almost inevitable that the extended period of historically low interest rates has finally run its course.
“Our view, like many, is that long-term rates should move moderately higher this year to between 2.5 and 3 percent and then press over 3 percent as we head into 2018,” says Kenneth Riggs Jr., CCIM, CRE, MAI, president of Situs RERC in Chicago, a real estate valuation advisory firm.
Yet whether those higher rates materialize remains to be seen. “I have been predicting a 100-basis-point increase in the 10-year Treasury for the past eight years, and I have been wrong eight years in a row — as have most economists on the planet,” says Spencer Levy, Americas Head of Research for CBRE in the New York City metro area.
After the presidential election, the 10-year Treasury note climbed to a high of about 2.65 percent. It has since dropped lower and was hovering at about 2.28 percent as of late April.
The inability of the Trump administration, at least in its first attempt, to pass healthcare reform was damaging to perceptions of U.S. growth expectations. That has manifested itself, not only in people being less optimistic, but also in a drop in the 10-year Treasury, Levy notes.
Uncertainty on interest rates and the implications for commercial real estate values and pricing has created a drag on investment sales. Transaction activity across all property types slowed in Q1 2017 to $75.7 billion, which was down 35 percent compared to the $116 billion recorded during the same period a year ago and decreased 46 percent compared to the $139 billion in Q1 2015, according to Real Capital Analytics.
Given the late stage of the cycle, investors are more selective and cautious, according to Riggs. “There are still buyers and sellers. However, there are not as many buyers as there were 12 months ago, and we see that in the number of transactions that are being completed,” he says.
At the same time, a significant amount of investment capital in the market needs to be deployed. In addition, the cost of capital remains historically low for borrowers. A tremendous amount of capital is out there from a diverse variety of sources.
The one exception is bank construction lending due to regulatory pressure, Levy says. “Access to capital for everything except speculative construction has never been stronger,” he adds.
Article is Courtesy of CCIM.com, written by Beth Mattson-Teig.