Fed Decision Viewed as Misguided by Some, No Big Deal by Others

Fed Decision Viewed as Misguided by Some, No Big Deal by Others

After much worrying and anticipation by investors, the Federal Reserve opted not to raise interest rates yesterday. Yet the reaction in the commercial real estate market fell short of jubilation. Some industry insiders felt that even a moderate increase in in the interest rate would have little bearing on the health of lending and acquisition activity, while others worried not changing the rate may have been a mistake.

Federal Reserve members cited the turmoil in the global markets and low inflation as reasons they were hesitant to raise the rate. An increase may still be on the table before the year-end, however.

But investor worries about the direction of the interest rate, which would likely be raised in a very cautious way anyway, are “much ado about nothing,” according to Christopher Macke, managing director of research and strategy with American Realty Advisors, a Glendale, Calif.-based investment management firm.

“Investors are suffering from the shiny object syndrome, incorrectly hyper-fixating on Fed action, which in the end will likely only be a gradual rise in short-term rates over an extended period of time,” Macke says. “Financial market volatility and fragility, as well as the second largest economy [in the world] materially slowing should be much more in investor focus.”

In the words of Ronald M. Dickerman, founder and president of Madison International Realty, a real estate private equity firm, “The current decision is a non-event and will have no impact for the present.”

“Everyone has the expectation that rates will rise and it’s just a question of when,” he adds. “Whenever rate increases begin, they will happen at a slow and steady pace, giving the industry time to adjust.”

On the other hand, Victor Calanog, vice president of research and economics with New York City-based research firm Reis Inc., worries the Fed’s reluctance to raise the interest rate may have unintended negative consequences. With real estate lenders facing intense competition for business in a near-zero rate environment, they may be more likely to loosen underwriting standards to unsafe levels, Calanog notes. Meanwhile, investors will remain willing to pay record-breaking prices for properties in gateway markets.

“I expected a nominal increase of about 1/8 of a point, but it turns out the Fed decided otherwise and left rates unchanged,” Calanog says. “Yes, there’s softness overseas and financial market volatility, but this time I fear that the Fed sent two bad signals. First, that U.S. economic growth is too fragile to withstand the current environment, and second—perhaps more insidiously—that interest rate policy is beholden to equity market gyrations. The Fed’ main job is to ensure full employment and price stability. I’m not sure they did it very well with this decision. With a low interest rate environment, there’s increase risk that competitive conditions (given razor-tight spreads) for commercial real estate lenders will lead to relaxed underwriting standards; and pockets of bubble-licious asset prices for specific property types in gateway markets will continue to inflate.”

It's true that a pro-longed period of low interest rates has the potential to lead to asset pricing bubbles, noted David J. Lynn, CEO of Everest High Income Property, a San Francisco-based private equity real estate firm. But the Fed is also facing a fragile global economy and low domestic inflation, as well as other macro-economic factors that have to be considered in its decisions.

“Are there dangers? Sure, there are always dangers when you have interest rates so low for so long,” he says. “But housing and economy and jobs are other factors. So [this decision] has been generally greeted in a very positive way.” 

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