The Federal Reserve has raised the federal funds rate 25 bps, to a target range of 1.25% to 1.50%. This was the Fed’s fourth 25-bps increase since December 2016 and was widely anticipated given the economy’s recent near-3% quarterly growth, robust job growth, record-low unemployment, modest wage gains and rising consumer and producer prices.
At its latest meeting, the Fed kept the federal funds rate at 1.0%-1.25%. An increase is expected in December, with economic conditions generally good. Commercial real estate fundamentals remain strong, and a Q4 rebound in economic growth should keep them healthy at least through H1 2018.
Most FOMC members agree that rates will need to head higher in the next few years, but how quickly is a source of great debate. Don't be surprised to see even greater indecision as uncertainty rises later in the cycle.
Upward pressure on cap rates is expected, muted by strong capital flows from foreign and domestic institutional investors. CRE fundamentals remain strong overall, and improved business and consumer confidence may lead to enhanced late-cycle tenant demand.
With the new administration at the reins and macroeconomic indicators sending mixed signals, investors are wondering what the future promises for the direction of the U.S. economy commercial real estate. This seems to be certain in investors’ minds: interest rates are likely to increase—at least in the medium term, if not in the long run. What would such increases imply for CRE, and particularly for CRE values?