Federal Reserve's Rate Hike
The Federal Reserve’s Quantitative Easing (QE) program has brought an unprecedented low interest rate environment creating historic returns in the commercial real estate space. Following today’s announcement from the Federal Reserve, we sat down with RealtyMogul.com’s Chief Credit Officer Megan Goodfellow to dissect the potential short term impacts and how to prepare ahead in this maturing cycle.
Q: Megan, what is your initial reaction to today’s decision made by Janet Yellen and the Federal Reserve?
Megan Goodfellow: Like many economists have predicted, this rate hike by the Federal Reserve was highly anticipated. Because of that, the effect of the hike has already been baked into long term borrowing rate. I do applaud the fact that, as of late, the Federal Reserve has been much more communicative to the market than before. Clear guidance moving forward from the Fed is also a good indication to the market and the impact it might in the CRE space.
Q: Do you anticipate additional rate increases in the future, specially in 2016?
Megan Goodfellow: Given the health of the economy and the low inflation environment, I think two or maybe four adjustments are possible in the next 12 to 18 months. However, the more important indicators we should look at are whether the Federal Reserve will provide additional guidance on how it sees both the direction of the economy and inflation in 2016 and beyond. The Federal Reserve also needs to provide a roadmap for 2016 and stick to it with clear communication to the market.
Q: Sounds like economy and inflation are critical inputs the Fed’s decisioning process, but what should CRE portfolio managers look at?
Megan Goodfellow: Economy and inflation are the two corner stones of commercial real estate. A stronger economy means the cycle will hold. Inflation is generally a friend of commercial real estate - most commercial leases will increase with low to moderate inflation as it will push cash flows up. Even if discount rates increase slightly in an inflationary environment, the cash flow should hold for the time being.
Q: Can you comment on how interest rates may impact CRE transactional volume in the future?
Megan Goodfellow: The Fed’s borrowing rate itself does not translate directly into long term lending rate. Because we anticipated this rate hike back in Q3 2015, the effect has already been baked into the long term borrowing rate ahead of today’s announcement. However, today’s announcement will definitely affect those that haven’t locked into their long term borrowing commitment. We also don’t think CRE transactional volume will see any material impact. Again, for those that are straddling the fence, today’s news might encourage them to lock into long term financing.
Q: What about CRE Portfolio Managers? What is their long term prospect?
Megan Goodfellow: When the market is in recovery, you don’t have to try very hard. However, great commercial real estate management teams make their name during a maturing cycle. Who will be the experts in holding onto value will start to show. Remember, inflation will also lead to high rent, so tenants that haven’t executed their long term options should think about executing those terms now. CRE managers should capitalize on today’s announcement and help their tenants lock into favorable long term leases. Having a great property management team will start to pay off in the coming years.
Q: How is RealtyMogul.com prepared for today’s announcement? And, what is your credit philosophy moving forward?
Megan Goodfellow: We thought this was coming Q3 of 2015. There was a slight delay with some of the economic news coming out of China. Nevertheless, our data science team has been working diligently to identity the risk and the opportunities as different sectors of the economy strengthen or weaken. We don’t expect a high rate of inflation in the coming years but everything we are doing here at RealtyMogul.com is to get ready to take advantage of what this cycle will present.
Q: And finally, Megan, what are some of the publications do you recommend for us to stay engaged with commercial real estate and the economy?
Megan Goodfellow: I personally follow the forward rate curves, Bloomberg news, and the latest data coming from the Mortgage Bankers Association and American Counsel of Life Insurance just to name a few. I also look at performance data of securitized commercial real estate products, REITs, and Private Money debt as those are good indicators to see how CRE managers are managing their portfolios.
This fireside chat with RealtyMogul.com’s Chief Credit Officer Megan Goodfellow on December 16th 2015.