The Federal Reserve has hiked interest rates 75 basis points. This means that the base rate is 1.75. It doesn’t seem like much, and historically, it is low, however, it is 7 times higher than the 25 basis points we had January 1st. Jason Dannatt points out in a recent email that this is a 700% increase. He says, while transactions will remain doable, these will be felt as big waves. He therefore, suggests obtaining lending now.
The Fed representatives say that they are doing this to decrease inflation. There seems to be the thought that interest rates cause inflation, and higher rates will slow inflation. I am not sure I understand this. I would have thought that the Quantitative Easing, or in other words the huge money printing would have been the cause of inflation.
What effect will rising rates have? Yes, higher rates might restrain some buyers. This, however, is not a crash. Doubtless, this will put pressure on cap rates. Residential markets, especially in places where demand is low and inventory is high, have thus see fewer sales or even lower prices. In Commercial estate, particularly in markets with high demand and low inventory, like Austin and other Texas metro areas, not much pricing correction is expected. So, no, contrary to what some neophytes in the residential market are hoping, CRE prices will probably not crash.
Dannatt suggests that real estate will be the best hedge against inflation. Given other options at this point, real estate looks very good. So, far from crashing, in a time of inflation, CRE will be increasing in value — not crashing.
Marcus and Millichap gives a more detailed analysis here. https://www.marcusmillichap.com/research/special-report/2022/06/financial-markets-special-report
Jason Dannatt is a lender in Cypress, Texas https://www.crctx.com/
Update on 7/15/2022
Faris Lee notes that global rates of return reached up past 17% and that we should expect this to fizzle out, given geopolitical tensions.
Further, may are nervous what will happen if the Fed does hike rates up another point, as it is rumored thy may do.
Still, none of this spells crash.
John Chang of Marcus and Millichap says location and asset class will be a more significant determiner of return than general market fluctuations, and urges a long term perspective.
In Austin, we are seeing some slight price pullback, but still extremely low inventory.