No Rate Hike, Maybe Later: Why CRE Players Won’t Sweat It Either Way

“The Fed didn’t do anything [on Wednesday],” said Paul Talbot, a senior managing director at Newmark Grubb Knight Frank’s capital markets structured finance team, shortly after the announcement. “But it’s economy-driven, and there isn’t a reason to raise rates yet. There’s no consistent improvement in the economy—it’s really a mixed bag.”

For most industry participants, the status quo was expected. “I wasn’t surprised. I thought it was the right move under an array of circumstances and mixed messages. It’s hard for even our best leaders and smartest policymakers to know they’ve made the right move,” said Geoffrey Kasselman, SIOR, LEED AP and an executive managing director, national industrial practice in NGKF’s Chicago office. “I think a better time to raise rates is probably at the next set of meetings in December when we know who the new president is, and we have a lot more information available on economic health—both domestic and global—consumer spending, employment and housing starts.”

Some saw the move as an indicator of how the economy’s current strength is perceived. “It says to me that the Fed is still not completely convinced, seven years or so after the financial crisis, that the U.S. economy has sufficiently recovered,” Jerome Sanzo, the executive director of real estate finance for Industrial & Commercial Bank of China (BACHF), told Commercial Observer Finance “The Fed seems to be in a staring contest with the markets, and the Fed keeps blinking. It certainly is not a statement of strong confidence in the economy.”

Andrew Singer, founder, chairman and chief executive officer of the Singer & Bassuk Organization, concurred that the economy isn’t ready for a raise in rates. “The concept of raising interest rates with inflation as low as it is is a very bad thing for the economy. We have all these politicians telling us how bad the economy is, yet the purpose in raising rates is to slow down the economy—why would you want to do that? It makes no sense to me whatsoever.”

One interesting turn of events this time around was a tripling in the number of dissenters among the regulators who voted, said Heidi Learner, the chief economist at Savills Studley. “We saw three people dissent, which for this committee is high,” she said. “Esther George has been the lone dissenter for a while and two other voting members [ Loretta Mester and Eric Rosengren] joined her in calling for a rate hike.”  

For now, borrowers with shorter-term maturities can breathe a sigh of relief. Especially as those mortgages—particularly construction loans—were likely underwritten with the assumption of rising rates. “There is now more cushion than previously expected,” explained Jerome Sanzo, executive director in Industrial & Commercial Bank of China’s real estate finance group, “because starting in mid- to late 2015, the Fed has been signalling a gradual rise in short-term rates, which smart lenders and borrowers underwrote in their projections, yet we have only seen one small increase in December 2015. So borrowers with floating rate loans will be temporarily relieved, although eventually the Fed will have to act, most likely in December.”

Indeed, the temporary delay in an inevitable hike could actually be a good thing, in giving the market some lead time to get comfortable and mentally prepare for it, noted Kasselman. “We can begin to bake this into our thought processes, our decision and our budgets. The Fed can almost have the effect of a raise by suggesting to the market that a raise will be in order in the future,” he said.

The general consensus among those COF spoke with this week is that the impact of a future hike in rates would be minimal. A single increase wouldn’t shake the commercial real estate market—rather, a series of hikes over a specific period would. “If it was 100 basis points in six months time that would be alarming to the market. But to me, the the real issue is found when this becomes a trend in combination with other variables,” Kasselman said.

Singer echoed this sentiment. “[An increase] would be such a small, incremental change that this change by itself would have minimal effect. The Fed could move rates a fair amount and interest rates would still be extraordinarily low. If rates went up 50 to 75 basis points, everyone borrowing money would be very unhappy but it wouldn’t stop them if the deals made sense,” he said.

An rate hike at the end of the year could add a little extra bleakness when coupled with risk retention implementation for commercial mortgage-backed securities on Dec. 24. “I do think that insurers have been picking up some of the slack with regards to banks’ willingness to lend. So I think it’s less of a pass-through issue and more of a risk appetite issue,” Learner said.

Talbot agreed, but said where some lenders bow out, others will step in. “The insurance companies are still bullish, the banks are still cautious, and there’s cautiousness on the CMBS side regarding risk retention. Conduits are busy trying to get their loans processed and securitized in the next month so they don’t have to deal with that situation. Where you’ll undoubtedly see activity is in bridge, mezzanine and preferred equity lending. These lenders are stepping in where traditional lenders won’t.”

Perhaps an even  more significant game-changer will need to be dealt with a month earlier—in November. “If a certain person wins and takes the market in a certain direction with him or her, we can agree that is a big variable, and together with a couple of rate hikes you could see an impact,” Kasselman said “This election isn’t just domestic, it’s global. The whole world is watching and holding their breath.”

Singer agreed, saying  “There is no way the sky would have fallen whether or not rates went up. It’s the trend that follows, and other incremental increases that you have to watch. Beyond that, the big issue is—who is the next president? That could make the sky fall.”