CRE Expected to Remain Solid Inflation Hedge Amid Fed Tapering
This month the Fed is reducing Treasury and mortgage-backed purchases by $15 billion to $105 billion.
Commercial real estate is one of the best inflation-hedge investments with interest rates expected to rise in the next six months in part from the Federal Reserve tapering of Treasury and mortgage-backed securities purchases, according to John Chang, Senior Vice President and National Director Research Services at Marcus & Millichap.
Chang noted in the third quarter commercial real estate volume is up 19% compared to the third quarter in 2019, adding that the rise in rates isn’t expected to lower CRE volume because there is too much capital looking for yield.
At the start of the pandemic the Federal Reserve restarted its quantitative easing program to put more cash into the economy by buying $120 billion a month in assets which has kept interest rates low, Chang said.
In January 2020, the interest rate on 10-year Treasuries was at 1.5% but dropped to .7% by March with the purchases and the rate stayed below 1% for the remainder of the year, which has helped boost spending and investment.
But in 2021 with vaccines kicking in and the economy improving, interest rates started to rise again to the 1.3% to 1.5% range, while inflation was picking up to two times pre-Covid levels.
This month the Fed will reduce purchases by $15 billion to $105 billion with another $15 billion reduction each month until the buying ends in June.
Chang said the tapering had not led to a shock wave in the markets because investors were anticipating it.
Opinions, of course, vary across the board about the effect tapering will ultimately have.
In September, David Pascale, senior vice president at George Smith Partners, told GlobeSt.com that the tapering of bond purchases could result in a selloff of Treasuries, which could increase interest rates for virtually all CRE permanent loans, which are typically priced over the 10-Year Treasury. “Higher rates could lead to higher cap rates and therefore lower values for CRE assets nationwide.”
Robert Frick, corporate economist at Navy Federal Credit Union, however, says it is a weak correlation to assume that tapering will boost the ten-year rate, just because the Fed will stop buying so many treasuries. He maintains that mortgage rates are not likely to rise given the ten-year is not likely to rise much from tapering.