Fed Follows Through With Expected Rate Hike—Here's How It Will Impact CRE

Janet Yellen, Federal Reserve, the Fed, interest rates
Former Federal Reserve Chair Janet Yellen

It comes as no surprise that the Federal Reserve has decided to implement a short-term interest rate hike this month.

Federal Governors have been signaling the coming move for several months; it held off in November until uncertainties surrounding President-elect Donald Trump's win were settled.

This is the first move the Fed has made since last December; it had projected four short-term rate increases in 2016.

Now that the 0.25% move is a go, the question is what the impact will be for the commercial real estate industry.

Typically interest rate increases lead to higher borrowing costs for property investors, impacting profitability and future acquisitions—particularly for REITs. But one short-term move, especially one as highly anticipated as this, may not have as great an impact, NORC at the University of Chicago chief CRE economist Jon Southard told Bisnow.

Property investors have waited all year for interest rates to rise, and have factored that increase into pricing already. But next year the low-interest rate environment is expected to change—markets are anticipating several short-term moves.

"The market is anticipating basically between two and four more next year in terms of what the Fed will do," Jon said. "The effect really comes from long-term rates rather than short-term."

If Trump's policies on corporate and individual tax cuts and job creation proceed as he plans, economists are anticipating higher inflation in 2017. Should that be the case, the Fed will move to balance it with incremental rate hikes throughout next year.

"[Trump's] slated policies on tax cuts and infrastructure spending will lead to higher deficits," Jon said. "All of these things are inflationary."

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