OAKLAND, CA-We’ve said it for months . . . maybe years. At some point, record-low, flat-as-a-lake interest rates are going to rise. Now that they have—from 1.76% to 2.56%, the guesswork as to how much higher they will go, and what further impact they will have, can begin.
And even though Fed chief Ben Bernanke swears that the fall easing of QE2 won’t move the interest-rate needle, there are those who are less sure. “Interest rates have been historically low, and that’s because of government intervention,” Susan Persin, locally based senior research director for Trepp, tells GlobeSt.com. “I wouldn’t be surprised if they went up further. How far, I can’t predict.”
The biggest impact will be on the overall economy, obviously, but there will be a ripple effect that will be felt industry wide, she notes, with a particular focus on REITs, which will feel the impact through shifts in the investments in both the building stock and the REIT stock.
(GlobeSt.com reached out to NAREIT for comment on the likelihood of another increase and its potential impact on the sector. The group chose not to respond, citing no ready research on the issue.)
For the market overall, “Higher interest rates will undoubtedly affect the economy,” the research director says, “which will impact demand for commercial real estate.” Higher rates will make housing less affordable and could affect or altogether derail the housing recovery. Higher rates could also lead consumers to cut back on purchases ranging from autos and travel to consumer goods. Declining demand for these goods and services would affect corporate expansions and their demand for all types of commercial real estate.”
For REITs specifically, while on one hand, their financing is locked in, providing some shelter, investors, always a “fickle” lot, she says, are likely to pull their capital into other vehicles. And in terms of REIT stocks, that fickle group has “poured money into REITs whose attractive dividends helped them achieve the greatest yields. As higher interest rates make yields elsewhere more attractive, investors will pull back on their REIT allocations to invest elsewhere.”
While generally, REITs tend to perform relatively well in high interest-rate environments, Persin says the sector has had a negative and “disproportionately negative reaction to the recent hike. “In the opening months of the year, she says, trusts were keeping pace with the Dow.
“Now, if you look at year-to-date returns, they’re well below,” she says. “The greater danger appears not to be higher borrowing costs, but rather any number of factors that could derail the nation’s economic recovery and make already skittish investors more nervous.”