Here's Why CRE Experts Are Predicting A March Rate Hike

Following the release of February’s strong jobs report in addition to several economic indicators that point to a strong labor market and continued economic expansion, commercial real estate experts are projecting a rate hike following the Federal Reserve's March 14-15 Federal Open Market Committee meeting.

U.S. employers added 235,000 jobs in February, a sizable increase, and unemployment dropped one-tenth of a percent to 4.7%. Those stats, in addition to inflation's continued rise toward central bankers' 2% goal, may trigger the move. 

Commercial real estate experts expound on the possible move and its impact on the industry below. 

Ken McCarthy, Cushman & Wakefield principal economist 

"Given the performance of the economy this year and the recent testimony of Chair Yellen, we expect that the FOMC will raise the Fed funds rate 25 bp on March 15," Cushman & Wakefield principal economist Ken McCarthy said. "The latest employment report for February was probably the clincher. Healthy job growth and rising wages indicate that the economy can withstand higher interest rates."

McCarthy said it is unlikely there will be a major impact on commercial real estate values from the Fed’s move, as they are more tied to long-term rates.

"The 10-year Treasury rate has [risen] following the election and now sits about 75 bps above the level before the election. A more important determinant of long-term rates will be the policies implemented by the Trump administration, which may both stimulate growth and increase the federal budget deficit. Stronger growth and a bigger deficit would likely cause long-term rates to increase. But we need to see what policies are implemented," he said. 

Calvin Schnure, NAREIT senior economist 

NAREIT economist Calvin Schnure said it is highly likely the Fed will raise rates at its March 14-March 15 meeting, citing comments made by Janet Yellen and several other governors about the likelihood of the move. 

"The economy, as well as REITs and commercial real estate markets, are well-prepared for a gradual rise in short-term interest rates," he said, adding that equity REITs are well-positioned for the move following a long economic expansion with job growth and solid consumer spending.

"An increase in demand for commercial real estate would likely support rent growth, commercial property prices and REIT valuations," Schnure said.

"The outlook for CRE remains positive, as growth of demand (net absorption) has matched and even exceeded new construction. Cap rates are low, but have a cushion in terms of the spread to Treasury yields that is wider than historical norms. This suggests that commercial property prices may not face significant risks from modest increases in longer-term interest rates."

Ray Torto, Harvard Graduate School of Design lecturer

Harvard lecturer Raymond Torto is 100% confident the Fed will raise interest rates this month, indicating that central bankers would not wish to fall behind markets. Cap rates will move in response.

"Spreads are already narrowing, making commercial real esate less attractive in an absolute and relative manner," he said. "I expect cap rates to rise less than the 10-year [Treasury] measured in basis points, due to the flood of capital still on the sidelines."

Stuart Eisenberg, BDO real estate and construction national leader

Eisenberg noted that the expectation of this month's rate hike has resulted in less of a doom-and-gloom response from the industry than previous increases. 

"The move seems to be more of a vote of confidence in the current economic momentum, which would allow for higher rent to offset the impact of future rate hikes," he said.

The immediate impact of a move would result in debt becoming more expensive, he said, which could tentatively cool commercial property investment as investors thoroughly assess the impact. 

"Traditional real estate players may feel the impact more than REITs, which aren't as dependent on debt," Eisenberg said. "With respect to cap rates, it was widely assumed that higher rents and a narrowing of the spread between cap rates and Treasury rates to historic norms could offset the impact of higher interest costs. However, the current situation in locations like Manhattan, where average rents went down in February across all apartment sizes for the first time in four years, may indicate a more serious valuation issue for real estate."

Victor Calanog, Reis Inc. chief economist

Taking into account the 235,000 new jobs added last month, Reis chief economist Victor Calanog said the Fed now has more leeway to make a move this month, considering the strength of the market and the unemployment rate's low level. 

"With that said, there is likely to be nary a ripple in the markets, zero change in cap rates, very little change in expectations for commercial real estate fundamentals, pricing and investment," he said.

Calanog said investors and money managers will not be shocked by the move, and have likely already priced and planned for three to four rate hikes this year, just in case.

"The bigger fundamental issue is whether sunny optimism about the Trump administration will wane as it becomes increasingly likely that significant fiscal policy proposals like tax reform won’t be implemented until early next year," he said. "That is the bigger driver of what will change investor and manager expectations — fiscal policy — more so than what the Fed does with monetary policy at this point."