Fed Rates Matter Little with Debt—for Now
Rates will likely go up this year, but that won't affect the debt market too much, according to our panel of experts at last week's Atlanta's Capital Markets event.
Right now, the US real estate market is the flight to quality throughout the world, so “how meaningful is a rate increase going to be?” asked SunTrust Bank Group VP Joe Pella (left). Joe's comments came the same day the Federal Reserve elected to keep the 10-year benchmark at near zero. But many of our panelists say that will be harder to do going forward. “I think there will be a lot of pressure to raise them by the end of the year,” says State Bank & Trust's Blake Snyder (right).
Joe and Blake were part of a debt panel that included Hunt Mortgage Group's James Kelly, North American Properties CIO Tim Perry, Cushman & Wakefield's Brian Linnihan and RealtyMogul.com's Chuck Taylor (who moderated). While domestic economic growth has been solid, James says the Fed is more motivated by global economic headwinds. “Right now, the No. 1 reason is China,” he says. “Considering what's going on right now, I don't see that they're going to [raise rates].”
When it comes to new development deals, the flood of capital is having the adverse effect of making it more expensive to build. That, plus a lack of construction professionals, makes quotes go up very fast. “We're seeing a lot more barriers to entry this cycle than in '06, '07,” Blake says. Tim (left) says land cost are also a big factor in whether a new development can pencil a prospective profit. “The land market has become frothy enough that you have to close very quickly,” he says.
Because of the multifamily development boom—coupled with the perfect storm of hungry capital looking to land in those assets—SunTrust is seeing more construction lending than permanent or longer-term requests. “We would love to see more of the fully funded opportunities out there, but we recognize today the market is very construction-based,” Joe (right) says. And assets are selling so quickly, developers are almost becoming merchant builders with “buyers taking the lease-up...right out from under them.”
During his keynote address, Hightower CEO Brandon Weber highlighted stats that showed how institutional investors are even more infatuated with real estate than in year's past: Some $7 trillion in institutional dollars is being steered toward commercial real estate this year, up from $2 trillion last year. “Commercial real estate is effectively institutionalized as an asset class,” Brandon says.
