An increase in rates

December 21, 2015 admin

The Federal Reserve raised interest rates last week (as many had expected). This is the first increase since 2006. The benchmark rate was lowered to nearly zero in December 2008 to help stimulate the economy following the global financial crisis.

In a statement, the Federal Open Market Committee noted:

“Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent.”

In the commercial real estate industry, the question has been: Will a rise in interest rates affect cap rates? The market consensus appears to be that a modest rise is unlikely to have a significant effect on cap rates. A MarketFlash from CBRE noted:

“We do not believe today’s move will have any impact on the commercial real estate markets and that the Fed likely has significantly more room to move before we begin to see real pressure on cap rates. That said, certain markets may be more susceptible than others to interest rate increases.”

The move by the Fed means that U.S. monetary policy is now moving in a different direction than that of Europe. According to Fergus Hicks, associate director at Cushman & Wakefield:

“The widely anticipated move by the Fed to increase U.S. interest rates highlights the divergence between the U.S. and European economies. European economies are showing modest growth, unemployment remains high and inflation is hovering around zero. Moreover, in contrast to the Fed, the European Central Bank continues to ease policy and implement its QE program, which it has also now extended. The U.K. is more closely aligned with the U.S., although Mark Carney has made clear that he is in no rush to follow the Fed in rate rises. That said, U.K. interest rates do look set to rise at some point next year.”

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LorettawebfinalLoretta Clodfelter is editor of Institutional Real Estate Americas.

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