Treasury Bump Sparks Worry About Interest Rate Rise

In the middle of refinancing two office buildings, Jeff Gural a top level executive at Newmark Knight Frank and owner of a large portfolio of commecial property in the city, noticed something this week that he hadn’t seen in a long time. Long term interest rates jumped up.

“Rates have been flat for a couple of months,” said Mr. Gural, who is refinancing 40 Worth Street and 515 Madison Avenue, which he said both carry about $100 million mortgages. “I think the psychology is starting to change. The economy is getting better. It’s like gas prices. Suddenly they go up.”

ron sernau Treasury Bump Sparks Worry About Interest Rate Rise

Ronald Sernau

Gino Martocci, a regional president at M&T Bank, said he noticed the bump, which brought the 10-year treasury rate from around two percent last week to about 2.3 percent by Monday, in part because the magnitude of the rise was amplified by the fact that rates are so low.

“It was about a 15 percent increase,” Mr. Martocci said.

Few in the lending business think that interest rates, which have been hovering at historic lows for months now, will rapidly continue to rise. There is still uncertainty hanging over the economy, especially in an election year.

“Rates often go up then they back off again,” Mr. Martocci said.

But the recent increase is being taken by many in the real estate lending industry as a potential sign that the days of rock bottom rates may now numbered.

“It was a shot across the bow,” Mr. Martocci said.

Ronald Sernau, a partner at Proskauer Rose who specializes in real estate and real estate finance, said he has yet to see landlords rushing to refinance in a way that would suggest many are beginning to think the low interest rate environment is waning. But he noted that rising rates put a heavy strain on owners and that he expected more refinance deals if the increases continue. Many landlords in the city weathered the recession’s dip in rental rates and occupancy levels by virtue of the minuscule interest many were able to pay on their loans due to the favorable rates at the time.

“If interest rates go up by five percent, which is a huge increase from where they are now, that would basically bring us to only to historical levels,” Mr. Sernau said. “Five percent is the difference between winning and losing for many owners right now.”

Bob Knakal, chairman of the sales brokerage firm Massey Knakal, said that rising interest rates would also put negative pressure on real estate values.

“It’s a balancing game,” Mr. Knakal said, noting that an improving economy usually brings higher interest rates but also better rents and occupancy levels, which can counteract the negative effects increasingly costly capital has on values.

“It’s interesting to watch what outpaces the other,” Mr. Martocci said.

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