Scott Shay, chairman of New York-based Signature Bank, has a simple message: now is the time to refinance. Mr. Shay urged borrowers to think about the combination of rising interest rates and low cap rates Wednesday morning in his keynote speech at the Real Estate Services Alliance’s Commercial Lender’s Forum. The event was held at Bloomberg LP’s offices in Manhattan.
Mr. Shay said that he would advise clients who aim to refinance, but want to wait until 2016 or 2017 and avoid making prepayment penalties, to do so now.
“If we get interest rates higher and cap rates higher, those properties trying to be refinanced may no longer meet the LTV test,” said Mr. Shay. “So I tell clients if you’re going to refinance, you should be refinancing now, pay the prepayment penalty because you may not underwrite in 2 or 3 years.”
Cap rates have declined as a result of interest rates, according to Mr. Shay, which is exhibited in largely unchanged cap rate spreads.
Greater attention should be paid to this scenario, he said.
“If you look at cap rates, cap rates have come down over time, and the same kind of cash flows that in the 1990s would have created $1 million in value, today creates $2 million in value,” Mr. Shay said. At the same time, “rates sooner or later are going to have to normalize to some degree.”
The Federal Reserve is also saying rates will spike, Mr. Shay said. Forecasts from the Fed’s Board of Governors note significantly higher rates as early as 2016.
The Fed is planning to end its bond and MBS buying program, known as quantitative easing, by October, according to minutes from a Fed meeting released Wednesday. The injection of money into the economy from QE is thought to have preserved the low interest rate environment.
While Mr. Shay believes the inflation expected to accompany the end of QE has most likely “bottomed out,” he said he is sure interest rates will rise.
“A three-and-a half percent, 10-year treasury would not surprise me at all in the next 12 months,” said Mr. Shay.