Economists Weigh In On Fed Rate Hike, Next Year's Expected High Interest Rate Environment
Economists say the Fed's decision to move short-term rates this month will have little impact on the economy or commercial real estate. Experts are more concerned with next year's outlook and whether President-elect Donald Trump's fiscal policies will require further tightening from the Fed to limit inflation.
Though the Fed foresees three additional rate hikes come 2017, most experts Bisnow spoke with are skeptical of those projections—particularly since the Fed had similar expectations going into this year and this is the first move on its part in 12 months.
Take a look at what these economists had to say.
Victor Calanog, Reis Inc Chief Economist
"It is often lost in the barrage of headline news these days, but one of the effects of the presidential election last November was to render the Fed’s decision on overnight borrowing rates Wednesday as largely a postscript.
"Other benchmark rates like 10-year Treasury yields have already [risen] by anywhere from 60 to 80 basis points in the last five weeks, given consensus expectations of an inflationary environment in the near term. This won’t immediately affect CRE pricing given how much more spreads have to tighten, but it does show that when rates move they can move quickly—and if 10-year Treasury yields push past 4%, expect to see pricing for riskier assets like equities and commercial real estate pricing come down. Before Nov. 8, I believe everyone was planning for rates to rise at a gradual rate over the next 12 to 24 months. Now, all bets are kind of off."
Jack Kern, Yardi Director of Research and Publications
"The Federal Reserve announced that interest rates will rise over a series of increases, effectively switching from the roulette wheel to the craps table. There is, in my view, insufficient evidence in the economy to justify anything more than an adjusted interest rate rise during December.
"The presumption of further increases in their more aggressive stance is out of touch with how both Wall Street and earnings statements have been trending. This is, in my view, a floating recession and the flatness of growth in certain sectors of the commercial real estate economy will continue as a result. By sending a signal that rates will rise more aggressively than generally, the Fed has assured tougher underwriting and significantly different valuations on the property side."
Bob Bach, NGKF Director of Reseach—Americas
"The quarter-point increase, the first since last December, was widely expected—baked into the cake—so I doubt that, by itself, it will have any impact on CRE or equity REITs.
"The Fed has penciled in three increases next year, up from their expectation of two hikes at their September meeting. A brisker pace of tightening makes sense for two reasons. First, the economy is in the midst of a post-election growth spurt that could extend into 2017. Secondly, we’re likely to see some fiscal stimulus next year in the form of tax cuts, an infrastructure spending bill and a loosening of business regulations, which will boost growth and inflation, setting the stage for the Fed to act.
"For better or worse, the Trump administration is likely to provide at least a temporary shot of adrenaline to the economy. This should boost leasing activity and cash flows for landlords, but could also put some upward pressure on cap rates."
Chris Thornberg, Beacon Economics Principal
"Wall Street has been incorrectly predicting Fed rate hikes since 2013. Finally they got it right—but not because of fundamentals. The shift in Fed policy is being driven by the surprising victory of Trump to the presidency. The markets see big deficit spending at the federal level—with tax cuts and spending increases heating up an economy that is already close to full employment.
"In short, the Fed sees an economy getting ready to move into a danger zone and is responding accordingly—by taking away the punch bowl before things get out of hand. Clearly rising rates will cool some of the effects of the stimulus, but will unlikely offset it completely—as such, if the predictions about a Trump deficit are correct, it shouldn’t matter much that rates are rising for the CRE markets—the stimulus and faster flow of credit will more than offset it. On the other hand, if the deficit hawks in Congress intervene, we may find predictions of inflation and higher rates not coming true and we could end up with a dangerously flat yield curve."
Kevin Finkel, Executive VP of Resource Real Estate
"Many things are going on in the interest rate world. We are likely right now in a rising interest rate fire—this is one little indication that that is true. To me the question is how does that impact multifamily?
"Mortgages will always figure out a way to pass on increases in costs to homeowners, so one thing we can anticipate seeing is mortgages getting more expensive, which ultimately means homeownership is going to be more expensive. The mortgage markets are already ultimately shut down to people who have poor credit anyway. And now, that will have more people coming into the apartment markets. The second thing this indicates is that we're in a strengthening economy. Consumers have more cash in their pocket—they may not be able to get a mortgage, but they have more cash in their pockets. That usually puts landlords in a positive position to raise rates.
"I don't have any expectations for interest rates as we go forward. This is not good fodder for the media, but the truth is forecasting interest rates is impossible—there's no way to tell where they will go. All it takes is one shock, either economic or political, all goes the other way."
Chris Muoio, Ten-X Senior Quantitative Strategist
"The effect on the economy of this rate hike by itself will be minimal, and this raise is in response to stronger wage growth and economic conditions we have seen over the second half of the year. While the Fed is projecting three additional rate hikes in 2017, they projected four heading into this year and only raised once, so the pace of hikes is still in doubt and will depend on how inflation and the labor market perform over the course of the year.
"For commercial real estate, financing and borrowing costs will rise in concert with interest rates, which could be a headwind for deal volume, though rates are still at very low levels historically. Cap rates will face upward pressure from rising interest rates, but cap rate spreads are higher than their historical norm in many sectors and may fall to help offset some the gains in interest rates.
"We believe valuation performance will become more closely aligned with the performance of property fundamentals going forward, as the rising tide that lifted all boats has dissipated. This would mean the multifamily and hotel sector are at risk, as NOI and RevPAR growth is decelerating as supply rises in these sectors. Trophy markets and assets, which were used as safe havens during the search for yield, are also at risk of falling valuations as they traded with very tight spreads during the cycle."
Rajeev Dhawan, Georgia State University/J. Mack Robinson College of Business Director of Economic Forecasting
"Today’s rate hike was a non-event but markets surprisingly reacted negatively to the hike. That 20,000 Dow was oh so close! What happened? There was a big degree of Trump-phobia before the Nov. 8 election but despite the 'soothing' words said in his victory speech, his recent tweet ambushes and public auditions for Cabinet positions did turn into Trumpophoria. That exuberance took a hit today as the Fed’s economic projections were no different than they were in September. Neither the GDP growth nor on inflation, but the confounding dot-chart signaled an extra rate hike in 2017.
"Net-net, it doesn’t matter what story you tell, good or bad, the end result is a rise in market interest rates. This in turn does the job of a Fed tightening—you raise short-term rates to nudge long-yields up, and if they are already up, then why raise short-term rates too much? I expect the Fed to move again in March, when their next economic projections are released, and wait to ride out [the] storm of policy changes in spring, and then move, if things settle, next December. Until then enjoy the same-old growth projections."
Raymond Torto, Harvard Graduate School of Design Lecturer
"Short rates will not have a lasting effect [on the industry] given the good fundamentals for CRE. Yellen said yes [we're likely to see more interest rate hikes in 2017]. And I think it is prudent for the Fed to get ahead of inflation. We have time to watch and see [that's the] best policy."
Stuart Eisenberg, BDO Real Estate and Construction National Leader
“With the 10-year Treasury yield at a 17-month high and interest and cap rates set to rise more, REIT returns and stock prices continue to be negatively impacted by rate and inflation concerns. While the increase in rates this month was expected and was thought initially to have minimal impact for REITs, uncertainty has increased following the election with respect to the timing and significance of future rate increases.”
Jon Southard, NORC at the University of Chicago Chief CRE Economist
"I don't think there’s immediate impact because it's been so anticipated. The effects will really come from long-term rates, rather than what the Fed is doing on the short end of the spectrum.
"The market is anticipating basically between two and four more moves next year in terms of what the Fed will do...Usually short-term rates will send longer-term rates up but it's all in relation to expectations basically. Long-term rates have moved up precipitously since the election...and that’s because people are anticipating inflation and/or uncertainty about US debt and they’re already assuming more aggressive Fed movements than they did before the election.
"Really it's the stated policies of both tax cuts, both corporate and individual and infrastructure spending leading to higher deficits, all of those things are inflationary."