Economists Weigh In: What's The Effect Of Negative Rates On Real Estate
Countries around the world are turning to negative interest rates as a way to stimulate economic growth—with even the Fed reportedly contemplating a move in that direction. But what would that mean? Bisnow has the answer (well, seven of them). We asked seven top economists for their take on what a move negative would mean for commercial real estate.
Ray Torto, Harvard Lecturer, Retired Global Chief Economist at CBRE
"First, I do not think that negative rates are working to stimulate economic growth. The underlying theory makes sense but the evidence indicates limited success in the economies where negative interest rates are being attempted. This is a serious issue as deflation can have devastating effects on economies as well as on commercial real estate.
The low or negative rates are part of the reason that cap rates are low today, and that prices are high for CRE. The concern is that rates will rise and so will cap rates, thereby lowering prices. Hence investors are slowing their purchases of commercial real estate.
So to your question: the negative rates have a positive immediate effect on commercial real estate pricing, but since such rates are viewed as abnormal, they raise issues as what to expect next! I think we will not have negative rates in the US, and that long-term interest rates will stay low for a long time—all of which is beneficial to the valuations of real estate assets."
Robert Bach, Director of Research—Americas, Newmark Grubb Knight Frank
"It doesn’t look like the Fed will resort to negative interest rates in the near term, since the Fed is more likely to tighten than to ease. Negative rates will be in the Fed’s toolbox should another round of extreme easing become necessary to combat future recessions. But other central banks have used it, including Japan, the ECB and some Nordic countries. Impacts on real estate are minimal. Some borrowers who mortgaged their homes are receiving monthly checks from their lenders instead of the other way around. The benchmark rates have gone so low that the mortgage rates pegged to them have also turned negative, meaning the lender owes the borrower money—usually a small amount. Some CRE borrowers use interest rate swaps, which level out the payments on floating rate loans. As benchmark rates fall below zero, the size of payments owed to the swap counter-party—the company that sold the swap to the borrower—will get bigger. Mortgages and swaps can be structured to prevent these situations, and no doubt they will be in future transactions. But negative interest rates are novel enough that older loans and swaps could result in these unexpected losses or windfalls (depending on the side of the deal you are on)."
Jamie Woodwell, VP of Commercial Real Estate Research, MBA
“The 2010s may well go down as the yield-less decade, with negative interest rates serving as the poster children. As a policy tool, negative interest rates are meant to induce investment and spur economic growth. From a market sense, they also serve as a sign of investors’ current preference for safety. US real estate has the benefits of being dollar-denominated and being seen as relatively safe itself. And while not a direct replacement for foreign sovereign debt, low or even negative international rates boost domestic real estate’s relative return and have induced an extra dose of cross-border investment—particularly for larger assets in major cities. For lenders, borrowers and others, if negative rates ever made their way to the United States there would be the potential for a host of operational challenges—as many systems and contracts never envisioned the possibility.”
Victor Calanog, Chief Economist, Reis
"In general, income-producing property offers a bond-like vehicle that will rise in popularity as interest rates dip lower, or enter negative territory. Despite the sluggish growth rate of our economy, on a risk-adjusted basis our commercial property options represent a relatively attractive place for foreign investors to park their cash. While this suggests capital availability for US commercial real estate, this also implies that cap rates may continue to stay low for an indefinite period of time—with attendant risks for any future turnarounds."
Jack G. Kern, Director – Research and Publications, Yardi
"A number of central banks are looking at invoking negative interest rates as a means of stimulating investment activity. This usually signifies a couple of things, the first of which is the fact that these central bankers have essentially run out of tools to stimulate their economies and next it shows the fear that regulated banks have about lending during these uncertain times. Unfortunately our federal reserve system, while unlikely to promote negative interest rates as a stimulus program have sent a message unwittingly to bank officers to tighten up credit standards and maintain more reserves. The request is understandable but the effect is devastating. The effect on commercial real estate has been almost immediate in a lot of places and the inability to obtain needed credit vehicles has slowed and even canceled many transactions. It is most likely that raising interest rates will make the problems more extreme and trigger some level of commercial loan defaults for those right on the margin. I doubt there will be a deluge of problems but rather a steep climb for those properties already headed to the courthouse one way or another."
Ken McCarthy, Principal Economist, Applied Research Lead for Cushman & Wakefield
"Negative rates should drive money out of banks into the economy including real estate. That should boost prices and lower yields. But there are probably going to be unintended consequences. One possibility is because capital is global, money will flow out of countries with negative rates to other countries and some of that is likely to come to US commercial real estate. The bigger picture here is the divergence of monetary policy in the developed world today with the US set to tighten further while Europe and Japan look to provide more monetary stimulus. This divergence is creating exchange rate pressures which, along with declining commodity/oil prices, are generating headwinds for some and tailwinds for others. As a net consumer of energy the US is benefiting from this environment spurring economic growth and attracting capital. It is this global divergence that is creating a tailwind for US commercial real estate."
Lawrence Yun, NAR Chief Economist
"Negative interest rates just mean lower than the absolutely positively lowest possible interest rates. Therefore, something would have to be greatly wrong with the broader economy, raising concerns for commercial real estate business deals and commercial real estate prices. At the same time, slow construction activity of recent past years has brought vacancy rates down and rents rising. A higher rental income in a world of negative interest rates will draw investors into this sector and bid up commercial real estate prices. Highly unlikely that the US will face a negative interest rate policy, but intriguing to consider the hypotheticals on what it could mean."