The Federal Reserve’s decision to increase its benchmark rate by 25 basis points for the second time in three months could affect seniors housing in several ways, National Investment Center for Seniors Housing & Care Chief Economist Beth Burnham Mace told McKnight’s Senior Living.
The move, announced Wednesday by the Fed on the heels of a positive jobs report from the Department of Labor last week, raises the target range for the federal funds rate to 0.75 to 1%. Mace said it did not take the market by surprise and is a signal in the Fed’s faith in the state of the economy.
“I think it’s a sign that the Fed believes that the economy is strong enough to withstand the effects of higher interest rates and the impact that higher interest rates will have on both the cost of debt and the cost of borrowing,” she said. “It’s part of the Federal Reserve’s plan, I think, in the long term to start to ‘normalize’ interest rates, because interest rates have been so low for so long.”
Additional interest rate increases are expected this year.
Other positive news related to the Fed’s action, Mace said, is that residents will start to see the interest rates on their savings increase.
“Not much, but a little bit,” she said. “More than what they have been: zero.”
The rate hike also will affect the cost of debt and lead to higher-volume borrowing costs, however, Mace said.
“It’s not a huge increase, but every little bit does have an overall negative impact,” she said.
The Fed’s decision also “potentially could have sort of a perverse effect in the sense of accelerating some investment now, if there’s a sense that rates are only getting higher, pulling forward some activity that may have happened later in the year or even next year,” Mace said.
“And eventually it could have an impact on real estate valuations through the impact that a higher interest rate has on the capitalization rates for real estate,” she continued. “It doesn’t go exactly in tandem, but you often see a change in cap rates associated with higher interest rates.”
Ultimately, Mace added, property valuations could be affected if net operating income doesn’t increase at the appropriate pace to offset the impact of higher rates.
Mace spoke about capital on Tuesday at McKnight’s Online Expo and will be participating next week at NIC’s Spring Investment Forum in San Diego.
