Low Fed Interest Rate Serves As A Double-Edged Sword for CRE
In late October, the Federal Reserve dropped interest rates to a range between 1.5 and 1.75 percent to make financing cheaper.
NEW YORK CITY – For commercial real estate borrowers, low-interest rates are great, but for banks, pension funds and endowments deflated borrowing costs mean decreased revenue streams, leading to an inflationary environment and threatening economic conditions, Jarred Kessler, CEO of EasyKnock, a real estate proptech company servicing homebuyers, tells GlobeSt.com.
In late October, the Federal Reserve dropped interest rates to a range between 1.5 and 1.75 percent to make financing cheaper, which spiked real estate deals in the capital intensive sector. Before the recent rate drop, several other proceeding rate cuts that started in July had investors flooding into the market to borrow on real estate deals.
“It’s good for real estate, but there are real unintended consequences if these financial entities are not getting certain yields. Because interest rates are down, they won’t have the cash flows to operate,” Kessler said.
Although lowered interest rates are good for capital intensive businesses borrowing money, the end result is an inflationary environment. For consumers buying homes, they fare better on borrowing costs, but for lenders they’ll bring home less money while great sums of capital are out the door, Kessler said. “Don’t expect local banks to pay you tomorrow,” he added.
The low-interest rates and its ancillary effects lead to uncertainty, which the market does not respond well to, and could have the opposite intended effect, where capital deployment is withheld.
“It’s a double-edged sword and people are flooding into the market for refinancing and which could get tenants cheaper market rent, but you don’t want an environment where people are putting bills under the mattress.”