The Federal Reserve took a “hawkish” stance last week with its 1.5% rate hike, and the 75-basis-point increase was “surprising,” John Chang, vice president and director of research services at Marcus & Millichap, said in a video recording to investors.
Previously, Fed Chair Jerome Powell had suggested that a 50-basis-point increase was coming, Chang said.
“But it appears Wall Street might have been tipped off a couple of days before the announcement, so the financial markets handled the bigger increase without too much volatility,” Chang said. “Nonetheless, the larger-than-expected increase could have some impacts on the commercial real estate market.”
Many lenders already had factored a 50-basis-point increase into their quoted rates, he said, adding that it’s likely that lenders might pass the unexpected amount of the higher rate hike onto buyers under contract.
“Some buyers may absorb it. Others may reduce their leverage to offset the change,” Chang said. “But a lot of buyers may use this opportunity to ‘take another bite of the apple’ and try to re-trade their transaction price.”
Several factors — including type, location, asset quality and the depth of the buyer pool for the type of property at the time of renegotiation — will affect the effectiveness of the renegotiation, he said.
Quoted rates could consider that another 75-basis-point rate hike could come after the Fed’s meeting next month, Chang said. An 85% chance of a rate increase at that level exists, he added.
The rate increase could have a positive effect on apartment rental properties, he noted. Home interest rates increased significantly last week, meaning a hit for new homebuyers to qualify for a mortgage. Fewer people qualifying for home mortgages will lift demand in the rental housing market, he said.
“Higher interest rates could thin the prospective real estate buyer pool. …Investors who are highly dependent on financing may have less maneuvering room and that could thin the buyer pool for some assets,” Chang said.
Even so, he said, enough competition exists in the commercial real estate market to keep capitalization rates low across most property types.
In summary in his video, Chang said, “even though rates are on the rise, you need to consider the future supply and demand balance for each property. Even though interest rates are back to what they were in 2018, deals can still pencil and future rent growth could still outweigh the cost of capital.”
National Investment Center for Seniors Housing & Care Chief Economist Beth Burnham Mace previously told the McKnight’s Business Daily that the rate hike could have a “silver lining” for the senior housing market “because it serves as a tailwind for occupancy.”