Interest Rates: 'The Elephant in the Room'
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NEW YORK CITY-While political and economic uncertainty generally are taking a toll on investment sales activity, no factor is creating more sleeplessness than what will happen to interest rates. The future course of interest rates—how soon, how rapidly and how far they rise from the current historically low rates—is “the elephant in the room,” panelist Warren De Haan, chief originations officer and managing director at SPT Management LLC, told a RealShare New York audience Tuesday. For his part, Michael Cohen, president of the tri-state region for Colliers International, foresaw a “continued conspiracy” on the part of the Federal Reserve to keep interest rates low for the time being, regardless of who’s elected President next month.
All of the panelists during Tuesday’s “Transactions Outlook” panel at the Grand Hyatt in Midtown, moderated by Faith Hope Consolo, chairman of the retail group at Prudential Douglas Elliman, had plenty to say about government’s influence on the outlook for either sales or leasing. Patrick Robinson, president of the Northeast region at Transwestern, said we’re currently seeing “the calm before the storm” that may set in with election results. Cohen said that when it comes to the effects that the legislative/regulatory environment has on CRE, “the devil is in the details”—and there are few details available.
One area in which the industry has little to go on is the capital gains tax rate, and there isn’t likely to be clarity until after the election. Should Barack Obama win re-election, Cohen predicted, we could see a flood of product hit the market before the year ends.
That lack of clear direction applies as well to local politics, which similarly can make a heavy impact on transaction potential. Robert Knakal, chairman of Massey Knakal Realty Services, noted that the industry in New York has been lucky to have pro-business mayors since Rudolph Giuliani took office in 1993; it’s far less certain what the agenda of the next mayor—likely a Democrat—will be until he or she is elected. That goes as well, Knakal said, for the attention to quality-of-life issues such as the crime rate.
On a macro level, Knakal said, “There’s really nothing that has been done to address the fiscal crisis.” Instead, he said, we’ve gotten “parsley on the plate.”
The global uncertainty has created a couple of major challenges in both the leasing and sales arenas. Asked by Consolo what he saw as the biggest hurdle, Robinson cited the difficulty in getting corporations to spend the capital they’re sitting on, by hiring and expanding. “That’s something we don’t control; we just have to react to it,” he said. Knakal brought up the challenge of getting owners to sell their properties: they often argue that while they may get an excellent price for the asset, there’s no other investment vehicle at present that offers an attractive place to put their money.
During the “Investment and Finance Forecast” panel that followed, Walker & Dunlop CEO Willy Walker expressed skepticism that we’d see a flood of post-election investment sales. Part of the problem, said panelist Jeffrey Lenobel, partner at Schulte Roth & Zabel LLP, is the amount of due diligence that the market currently requires; it’s difficult to get that done in the limited time frame between the election and New Year’s Day. If a seller hasn’t started the process by now, Lenobel said, “it’s almost too late already.”
The panelist offered a wealth of insights on the finance outlook. Lenobel noted that private equity firms have become the next big player in CRE. “We’ve seen private equity perform many functions,” ranging from construction financing to mezzanine lending, he said.
Walker, who’s also chairman and president of his firm, lamented the frustratingly slow resurgence of CMBS in the face of still-limited appetites for lending on the part of traditional sources such as life companies. He cited a study predicting that new-issue securitizations could reach $60 billion in a few years—a far cry from the $300 billion to $400 billion the market needs to have financed each year. “Sixty billion doesn’t do it, doesn’t get you there,” Walker said. “Either it’ll have to be CMBS or something new, because the banks won’t do it for you.”
Moderator Gene Berman, EVP and managing director at Marcus & Millichap, said that when it comes to sales of prime assets in prime markets, the deals lately have been “primarily all-cash. The financing is after the fact.”
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