Will rising interest rates slow commercial real estate deals? Execs are worried

Image provided by CIT Group

Image provided by CIT Real Estate

by Dan Rafter

Commercial real estate leaders are confident in the strength of the commercial real estate market. But they’re also realistic enough to recognize that all commercial sectors will face their own challenges in the coming months.

And they’re especially worried that rising interest rates could put the brakes on what has been such steady commercial real estate activity during the last two-plus years.

That’s the result from a May survey from CIT Group, in partnership with Forbes Insight, of 201 senior real estate executives from brokerages, management companies, law firms and financing providers.

According to the survey, 52 percent of commercial real estate executives said that they believe their segment of the market is either strong or very strong. In more good news, a total of 71 percent of the survey’s respondents said that there is enough capital available for investors hoping to make commercial deals.

The study of 201 senior commercial real estate executives found, too, that 47 percent of executives said that the commercial real estate market remains in recovery mode. But 44 percent said that some CRE segments are also poised for a significant decline. Most notably? The multifamily sector, which has been so hot for so long.

“Multifamily will be the segment with the biggest corrections if there is a correction,” said Matt Galligan, president of CIT Real Estate Finance. “That segment is so interest-rate driven, and the valuations have been so high. It is very possible that future increases in interest rates will impact the multifamily market. If there is an interest-rate swing of 100 basis points, say, that can be very problematic for that asset class.”

Executives told CIT that interest rates, and the possibility that the Fed will continue to increase the federal funds rate, along with consumer confidence, U.S. tax rates, unemployment and the global economy are the five biggest factors that will either slow or boost the commercial real estate market throughout the rest of 2016 and into 2017.

While 71 percent of executives said that there is enough capital available for investors, 24 percent also said that capital is available only for the “right deals.” Slightly more than half of respondents said that they are seeking longer-term loans as a way to lock in today’s relatively low rates over a longer period.

Despite the mixed optimism expressed by executives in the survey, Galligan said that this remains a strong time for commercial real estate.

“The two main drivers today of commercial real estate activity are interest rates and employment,” Galligan said. “We have had good employment numbers. They’re not exactly robust, but they are steady. That is a great thing for commercial real estate, steady employment numbers.”

Galligan cited positive news regarding interest rates, too. Yes, executives are right to worry that rising interest rates might slow commercial real estate activity. But interest rates have been at historic lows for a long time. When the Federal Reserve Board raises rates, that’s a sign that the overall economy has strengthened. And a strong economy is good for commercial real estate.

At the same time, the Fed has shown an inclination to raise the Federal Funds Rate only at a slow, steady pace. This measured pace should result in as little disruption to the commercial real estate industry as possible, Galligan said.

Then there is consumer disposable income, also a key factor in the health of commercial real estate. Galligan said that consumers today do have more extra income to spend. And that’s something that he doesn’t see changing any time soon.

“With higher employment levels, consumer disposable income should increase, too,” he said. “That can only be a positive for the commercial real estate industry.”

This begs the question: Why weren’t commercial real estate executives even more optimistic in the CIT survey?

“The tone of the market clearly shifted in the last 90 days,” Galligan said. “People, I think, are overly negative today. They are more negative than is warranted by what is actually happening in the economy. We have had such a good run lately, people get pretty negative when they think about what could happen to interest rates.”

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