CALABASAS, CA—Despite frequently voiced industry concerns that an interest rate increase will put a damper on values as well as sales activity, Marcus & Millichap doesn't see the eventual increase disrupting the real estate markets. For one thing, the short-term federal funds rate, which relates mainly to consumer debt, is not the same thing as the longer-term benchmarks that govern commercial real estate lending and valuations.

Most commonly, the longer-term rate is the 10-year Treasury, which doesn't move in unison with the federal funds rate, according to a special capital markets report from MMI. “Many factors, including equity market volatility and investors' demand for risk-free investments, affect the level and direction of the 10-year Treasury yield,” the report states. Furthermore, says William Hughes, SVP of Marcus & Millichap Capital Corp., “The 10-year Treasury ended the third quarter in the low 2% range, held down by rising demand for low-risk, fixed income assets.”

MMI says that readily available capital, coupled with a wide range of active lenders, will keep interest rates competitive in the coming months, and the timing of the Fed action isn't expected to have a negative impact on CRE lending, especially since the Fed is expected to raise rates slowly and incrementally.

In multifamily, for example, lending rates have remained steady, Hughes writes in the report. “The GSEs underwrite 10-year apartment loans at rates ranging from 4.3% to 4.7%, and leverage of up to a maximum 80% in select instances,” he writes. “Portfolio lenders are also active and offering similar LTVs with rates from 3.85 to 4.50%. In the realm of bridge loans, LTVs of 70% are the norm for stabilized properties, with spreads between 250 and 400 basis points above Libor; these metrics shift to 80% LTV and 350 to 500 bps above Libor for value-add deals.

Although there are headwinds that could delay an increase in the federal funds rate—including soft manufacturing and exportsrelated to the strong US dollar, and “anemic” inflation—the market conditions that will encourage the Fed to act are also good for CRE. The Fed's decision to move the needle on interest rates “will rest upon a foundation of solid economic trends that will also underpin increased space demand and propel rents in all types of commercial space,” according to MMI.

Most significantly, “the addition of nearly 200,000 jobs per month this year through September has reduced the labor force slack that lingered since the beginning of the recovery,” according to the report. “The accompanying declines in the unemployment and under-employment rates to post-downturn lows remain primary justifications cited by the central bank for a rate hike.”

MMI also sees “forward-looking employment indicators” such as a record level of job openings and high CEO confidence, pointing the way to further near-term gains in staffing along with “intensifying inflationary pressure as wages rise.” Payrolls are ahead of the previous peak by about four million workers, and job growth has become more broad-based across the US.

“The number of full-time workers is also hovering near its pre-downturn high,” the report states. “Cuts in employment in oil-and-gas sectors this year are the only blemish on the otherwise solid state of the labor market repeatedly referred to by the central bank as an impetus to tighten.”