Expected Interest Rate Increases This Year Remain Top CRE Concern
Rising interest rates remain the top concern for commercial real estate executives this year, with 80 percent of respondents in a sentiment survey by a Chicago law firm expecting law firm expecting multiple rate increases amid clear expectations that the anticipated increases would begin to weigh on commercial property markets in 2018.
For the second straight year, an overwhelming 98 percent of executives in the commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – surveyed by the law firm Seyfarth Shaw predicted at least one increase this year, with 37 percent projecting three rate hikes by the Federal Reserve over the next 12 months, up from just 14 percent a year ago.
This CoStar report on national and Philadelphia commercial properties is being offered through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.
“As the real estate industry embraces the tax cuts, low unemployment, and stock market success, industry insiders expect today’s economic factors to force the hand of the new Federal Reserve chair and, consequently, shape their 2018 investment strategies,” Seyfarth Shaw attorneys Christa Dommers and Ronald Gart said in revealing this year’s top concerns of property executives in the third annual Real Estate Market Sentiment Survey.
“Respondents clearly believe that multiple interest rate increases will start to have a material adverse impact on the commercial real estate market,” Gart and Dommers said.
Federal Reserve Chairman Jerome Powell, in his first extensive public comments since taking over for Janet Yellen earlier this month, recently told a Congressional committee the economy encompassing U.S. and Philadelphia commercial real estate properties is stronger than at the beginning of the year, and the central bank plans to raise rates gradually.
“My personal outlook for the economy has strengthened since December,” Powell told the House Financial Services Committee under questioning about whether the Federal Open Market Committee might boost its number of projected increases from three to four next month when the FOMC formally updates its outlook.
“After easing substantially during 2017, financial conditions in the United States have reversed some of that easing,” Powell told the committee. “At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labor market and inflation. Indeed, the economic outlook remains strong.”
Analysts following U.S. and Philadelphia commercial real estate markets attributed part of the recent sharp decline in the Dow Jones Industrial Average to Powell’s optimistic comments. Over the past week or so, the DJIA has shed nearly 1,200 points, falling more than 4.5 percent, including a more than 500-point decline in response to government plans to impose tariffs on steel and aluminum imports.
About 63 percent of the 157 executives dealing in both national and Philadelphia commercial real estate listings, the strongest surveyed by Seyfarth Shaw, believe the U.S. CRE industry can absorb an interest rate increase of between 0.5 percent and 1.5 percent. About 15 percent believe real estate markets can only handle an increase of up to half a percentage point, roughly equal to the number of respondents who said the industry could withstand from roughly 1.5 percent to 2 percent in increases.
The U.S. federal funds rate now stands at 1.5 percent. Three more hikes would take it to 2.25 percent.
However, a newly released CBRE survey of the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – suggests that investors aren’t as concerned about rising interest rates as they are about a potential worldwide “economic shock” that could undermine occupier demand.
“Despite the possibility of escalating interest rates, the majority of investors intend to acquire assets in the Americas,” said Brian McAuliffe, president of institutional properties in CBRE’s Capital Markets group. “Risk tolerance is expected to remain unchanged but investors’ search for yield and asset diversification is pushing them toward value-add assets, secondary markets and alternatives [assets] in 2018.”
The CBRE Americas Investor Intentions Survey revealed that respondents involved with U.S. and Philadelphia commercial real estate listings were more positive going into 2018 than last year due to several factors, including the long economic expansion, new U.S. tax cuts and favorable regulatory changes. The largest share (45 percent) of respondents plan to increase acquisitions in the Americas over last year, a reversal of the downward or flat trend of the prior two surveys.
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