December 22, 2016

Increased Fed Rate Results in Mixed Signals for Investors

The Federal Reserve Raises Interest Rate

interest-rate-graphThe Federal Reserve increased its overnight rate by 25 basis points to a range from .50 percent to .75 percent. This decision reiterates the positive  economic outlook for 2017 that could accelerate monetary policy this upcoming year. Rising rates will remain a significant factor in the commercial real estate market that could force asset repricing.

 Factors that Contributed to Raise of Interest Rates

The historically low unemployment rate of 4.6% allows the Fed to believe the market is stronger than ever. However, the tight labor market will support wage growth, raising inflationary pressure, and prompting the Fed employment-trendsto remain highly vigilant in the upcoming year.

Past Federal Reserve monetary policy tightening decisions triggered a decline in the stock market and lowered long-term Treasury rates. This increase was widely expected and could be different. The Federal Reserve rate increase is largely already baked into the 10-Year Treasury rate, which has risen by nearly 80 basis points since early November. Lenders have held spreads through this period, raising borrowing costs and widening the buy/sell expectation gap.

Investors Reassess Future Yields

Rising rates widen gap in expectations and slow transaction velocity as investors reassess prospective yields. While many sellers are still trying to achieve peak pricing, buyers are reevaluating acquisition criteria in a rapidly moving capital environment. The performance outlook remains positive, but modest upward pressure on cap rates is emerging.