Sources: Low Interest Rates Mean Little if Fundamentals Decline

WASHINGTON, DC-If Federal Reserve Bank chairman Ben Bernanke had hoped to stabilize markets with his announcement on Tuesday that the central bank would keep its low interest rate policies in place for two more years, he must have been sadly disappointed the following day. By mid morning the Dow Jones Industrial Average was down 300 points and NASDAQ and S&P 500, down 2%.

Then again, the Federal Reserve has never been about day-to-day fluctuations in the stock market. Rather, it keeps its eye on and focuses its policies on the long term. In that respect, it may have succeeded, somewhat, in calming not only the general equity market but also the commercial real estate space. "I think everyone believes, if the market allows it, we will be in low interest rate environment for the foreseeable future, which should bode well for cost of debt in the real estate industry," says Dan Fasulo, managing director and head of research for Real Capital Analytics.

Another piece of evidence weighing on the side of long-term economic stability: also on Tuesday, the Treasury Department was able to sell its first AA+ rated bonds to investors with little difficulty. Indeed, as Peter Cohan of Peter Cohan & Associates notes, "if S&P’s downgrade had been based on any kind of prescience, investors would be dumping the ten-year bonds and interest rates would be rising."

Instead, he tells GlobeSt.com, the ten-year interest rate has dropped by 32% since the beginning of July. "Put another way, investors are 2% more confident in the US’ ability to preserve their capital and are willing to invest here," at least relative to other investment choices.

More worrisome, however, is the significant drop in confidence and what has been a clear slowdown in growth. Both factors, many in the industry fear, will translate into an upcoming erosion in real estate fundamentals. "The investment community is more worried about our underlying economy than any statements that the Federal Reserve might be making," Fasulo says. Real estate fundamentals have been on an upward trajectory over the past 18 months especially in the primary markets, he notes. For such markets as Washington, DC and New York, that is likely to continue.

Doubts, though, are growing for secondary markets, where the recovery only just began to take hold. "That recovery could be tempered given everything that is going on now," Fasulo says. But even cities outside of DC and New York stand a good chance of maintaining their momentum, he adds, noting that a building just traded in Seattle at a 5.5 cap rate, "which is close to record pricing. And Seattle, while a good market, is definitely not on par with DC or New York."