nterest rate sensitivity
is high on the radar
screens of Bank of America
Merrill Lynch clients.
Markets are closely
monitoring the actions
and words of Fed Chair
Janet Yellen and savvy real
estate investors are also
paying closer attention to
treasury rates and bond
Many BofAML clients
understand that a rate hike is likely before year’s
end, and that is the view of BofAML economists.
However, it is the severity of the increase that
has the potential to have the most impact on
“The consensus expectation of our
customers is that interest rates will increase
gradually,” said Mark Sharer, Mid-Atlantic
Market Executive for Bank of America
Merrill Lynch. “There have been increases in
the past where the Fed raised rates 200 basis
points within a year, which led to economic
volatility. The change in velocity of interest rates
is data dependent, and right now there’s not
material concern about inflationary pressures.”
The Fed said it will likely raise interest rates
if both job growth and inflation are in place.
Throughout the first three quarters of 2015,
economic data revealed a steadily strengthening
economy, led by job creation and an unemployment rate that Federal Reserve economists
estimate will hit 5% by year’s end.
Companies are not only creating jobs, but
are increasing wages, an inflationary pressure.
Bank of America Merrill Lynch research shows
that the employment cost index has accelerated
in relation to productivity growth, foretelling a
rise in inflation toward the Fed’s 2% target.
However, the Fed delayed a rate hike at its
September meeting because of several
deflationary warning signs.
While there isn’t a direct connection between
the various tools the Fed has to tighten the
money supply and commercial real estate loan
rates, supply and demand is a major factor. For
example, with the 10-year Treasury note paying
near 2%, and cap rates, or cash flow as a
percentage of property value, near 5%, there’s a
reasonable return for the additional risk involved
with a real estate investment. But when the risk
premium narrows, real estate investors are more
selective and capital flows to other asset classes.
In terms of availability of capital, private
equity groups play more in the property
acquisition game as financing is readily available
and less expensive for them. Private mid-
dle-market clients are choosing development
and construction of new properties, particularly
multifamily. Prices, or spreads on loans, for
those have increased somewhat as lenders
manage asset class and market capital expo-
sures. Favored investments are multifamily,
transit-oriented and downtown properties.
Secondary and tertiary real estate markets are
benefiting from the flood of investor capital that
is seeking yield.
Barring a rapid or aggressive tightening of the
money supply by the Federal Reserve, which is
not expected, the Goldilocks economy—not too
hot or too cold —appears to be in balance.
Regardless of the interest rate environment,
Bank of America Merrill Lynch maintains its
commitment to be a provider of real estate
capital, market intelligence and advice to clients.
The real estate cycle:
The inevitable rebound of rates
Late-year increase expected after Fed delays rate liftoff
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