The Fed, Interest Rates And The Good News For Commercial Real Estate
April 29, 2021 | Calvin Schnure | Forbes
The Federal Open Market Committee left interest rates unchanged at its April 27-28 policy meeting, and reaffirmed its commitment to keep rates low until the economy has recovered more fully from the pandemic. Rates are at historical lows, however, and will certainly move higher as the economy gets back to pre-pandemic levels of activity. Some observers have expressed concern about the impact of higher rates on commercial and residential real estate markets. Most of the evidence, however, suggests that the rate environment will remain favorable for real estate.
Most people are familiar with the effects that interest rates have on housing markets. Lower rates on home mortgages reduce the financing cost of a home purchase, and often spur home buying, new construction, and increases in house prices. We are currently in the middle of a housing boom, fueled in large part by current low mortgage rates. Of course, this process can work the same way in reverse, and higher mortgage rates generally slow home buying and cool the housing market.
The same forces are at work in commercial real estate, as properties are frequently financed with commercial mortgages. As a result, commercial real estate markets are often considered one of the sectors of the economy most exposed to interest rates. The current risks are not large compared to previous periods, though, as in many property sectors debt loads are more moderate than in the past.
