More Than One-Third of Respondents Anticipate Three Federal Fund Rate Increases in 2018
Federal Reserve Chairman Jerome Powell provides the semiannual Monetary Policy report to the United States Legislature on Feb. 27.
Credit: Federal Reserve Bank
Increasing rates of interest stay the top concern for commercial realty executives this year, with 80% of participants in a belief survey by law firm Seyfarth Shaw expecting several rate increases in the middle of clear expectations that the awaited increases would begin to weigh on industrial property markets in 2018.
For the second straight year, a frustrating 98% of executives surveyed by the Chicago-based company anticipated a minimum of one increase this year, with 37% forecasting 3 rate hikes by the Federal Reserve over the next 12 months, up from just 14% a year back.
“As the real estate market accepts the brand-new Trump tax cuts, low unemployment and stock exchange success, industry insiders expect today’s financial elements to force the hand of the new Federal Reserve chair and, as a result, shape their 2018 investment methods,” Seyfarth Shaw lawyers Christa Dommers and Ronald Gart stated in revealing this year’s leading issues of property executives in the third annual Realty Market Belief Study.
“Participants plainly think that multiple rates of interest increases will begin to have a material unfavorable impact on the commercial property market,” Gart and Dommers stated.
Federal Reserve Chairman Jerome Powell, in his very first extensive public comments since taking over for Janet Yellen previously this month, informed a Congressional committee today that the economy is more powerful than the start of the year, and the central bank strategies to raise rates gradually.
“My personal outlook for the economy has actually strengthened considering that December,” Powell informed the House Financial Solutions Committee under questioning Tuesday about whether the Federal Open Market Committee may increase its number of predicted increases from three to 4 next month when the FOMC formally updates its outlook.
“After relieving significantly during 2017, financial conditions in the United States have actually reversed some of that easing,” Powell told the committee. “At this point, we do not see these developments as taxing the outlook for financial activity, the labor market and inflation. Indeed, the financial outlook stays strong.”
Analysts attributed part of Tuesday’s almost 300-point decrease in the Dow Jones Industrial Average to Powell’s positive comments.
About 63% of the 157 executives surveyed by Seyfarth Shaw believe the U.S. CRE industry can soak up a rate of interest increase of in between 0.5% and 1.5%. About 15% think realty markets can only handle an increase of as much as half a percentage point, approximately equivalent to the variety of participants who said the market might stand up to from roughly 1.5% to 2% in increases.
The U.S. federal funds rate now stands at 1.5%. Three more walkings would take it to 2.25%.
Concerns about the “end of the present development cycle” went into the Seyfarth Shaw belief charts with a bullet this year, ranking number 3 on the list of the best issues for the industrial residential or commercial property sector in 2018, behind increasing rate of interest and challenging supply and demand basics. Concerns over the effect of banking regulations and the wall of growing CMBS loans on the industry fell from the previous year’s survey to seventh and ninth, respectively.
The Seyfarth Shaw study results mirrors rising concerns in Real Estate Roundtable’s First Quarter 2018 Belief Index, which exposed a visible decline in ball game of 57 for existing conditions to 51 for future conditions.
Respondents are feeling comfortable about the stability of the real estate market in 2018, however numerous revealed concerns about exactly what the market might look like next year, Roundtable stated, citing participant comments such as “heading into 2019, it gets foggier.”
“Individuals are meticulously optimistic but reserved,” one participant said. “The length of time can the cycle run? We think the window of visibility is a lot shorter than it was. Individuals appear to feel great about this year, but beyond that, I cannot say they know the best ways to feel.”
“It’s stable, however you can see signs of slowing,” said another executive. “Transaction volume is down and groups are being careful.”
The Trump tax turbocharge ought to prime the pump for continued development, Seyfarth Shaw survey takers agreed, with 58% believing the new Tax Cuts and Jobs Act signed into law by President Donald Trump late in 2015 will extend the current growth by at least one to two more years.
Personal equity and institutional investors are the top primary sources of equity for respondents in 2018. with more third-party investment expected this year than in 2017. Respondents viewed personal equity, which jumped from number 3 to number 1 this year, as the favored source due to its brand-new tax advantages and present favorable financial conditions.
Nearly three-quarter of study respondents (73%) reported that infrastructure would not be a part of their investment method. Some 96% of participants, on the other hand, report they have no strategies to utilize cryptocurrency such as Bitcoin in their deals due it its viewed volatility, absence of understanding and lack of regulation.
Even more, about 43% believe the increase of ride-sharing services such as Uber and Lyft will impact their analyses of acquisition and development of business property, with decreased parking ratios and distance to public transport triggering financiers to re-evaluate their residential or commercial properties and strategies.