How Will CRE React to the Fed Hike?

LOS ANGELES—Yesterday, the commercial real estate industry took a much-needed breath when the Fed unanimously voted to raise interest rates for the first time in seven years. In an expected move, the Fed increased rates from 0% to .25% to .25% to .5%, citing the job and wage growth as the impetus for the decision, and vowed that further rate increases would be slow to come. Following the decision, we sat down with Jeff Rinkov, the CEO of Lee & Associates, to get an initial reaction and to gauge how this might impact the commercial real estate market in the coming year. In this exclusive interview, Rinkov tells us why the rate increase was the right move and how it should reinforce economic confidence and position the market for a healthy year ahead. 

GlobeSt.com: What is your initial reaction to the Fed's rate increase today?

Jeff Rinkov: My initial reaction is that this probably means that the economy is healthy from a 360-degree view and that the Fed believes that it is time to return towards a more normal monetary policy. We have been in a period where monetary policy has incentivized growth and borrowing, and from a real estate standpoint, it has incentivize development and it has allowed values to come back and grow and for the fundamentals to become very strong. I think now we're going to find out, at least a little bit, if the economy is strong enough for the real estate market to operate on more normal terms.

GlobeSt.com: Do you think it is strong enough to operate on normal terms?

Rinkov: I think it is. I didn't hear anything from the Fed that leads me to believe that we are going into a succession of rate increases. I do believe that this was appropriately timed. I think the negatives potentially are that the rest of the world is not gaining the same strength or is on the same trajectory. There is weakness in South America and there is weakness in certain parts of Europe, but I think that it is the right time and the right move for the US.

GlobeSt.com: How will this impact commercial real estate, if at all?

Rinkov: I think initially, the reaction is very tepid. I don't think that there is upheaval or that there is stagnation. I think we are in a period in the market that there is a lot of momentum for continued transaction velocity. We will remain in a global world that is trying to find yield, and I don't think that 25 basis points is going to detract from the value of real estate from an investment standpoint. I believe that it may be a catalyst for people who believe that there are more rate increases coming to accelerate the deployment of capital for real estate acquisitions because of the favorable debt relative to where they see debt rates in 12 to 18 months and beyond.

GlobeSt.com: The Fed was very clear that further rate increases would come slowly. Do you think that will help put the CRE industry at ease or dissuade any concern in the industry?

Rinkov: I think that was the intention. They were trying to get people to understand that the market could absorb a 25 basis point rate increase, and that they are going to continue to be ease driven; that they don't have a mandate to get to a certain rate level; and that they are in a wait-and-see mode.  I think that language is more important than the rate increase. Everyone will ultimately gain some confidence from that step.

GlobeSt.com: We are, of course, talking about short-term interest rates. Do you think long-term rates will follow suit?

Rinkov: I think we have seen long-term rates being stable and almost come down some. We have a real slacking of the yield curve as short-term rates have gone up just a bit and long-term rates have been really stable, so I think that long-term rates will probably remain very stable. The Fed itself has two mandates: employment level and control over economic growth and inflation. With oil prices and commodity prices being so low, I don't think that we are at any threat of inflation or inflation that damages the economy in the near term. I don't see long-term rates going far and I don't see many rate increase beyond this.

GlobeSt.com: Even with this announcement, do you still believe that we are set for a healthy 2016?

Rinkov: Yes. I think the message of the rate increase, while it may change some underwriting and it may add a drop of sobriety into some spread sheets, it will be a very strong year. The fundamentals are still very good and I think there are more catalysts for continued activity in commercial real estate.