Interest Rates Are Everything

LOS ANGELES—Twenty years ago, interest rate predictions were never a topic of discussion in commercial real estate circles, and that it was because they were impossible to predict. Today, it is just the opposite, with CRE experts regularly discussing where interest rates are heading. This dichotomy was the topic of keynote speaker Ethan Penner's, founder and managing partner of Mosaic Real Estate Investors, kickoff speech at RealShare Los Angeles yesterday,

“Interest rates are everything,” Penner said in his speech. It is the measurement of how we drive relative financial assets, and real estate is a financial asset.” He focused the whole speech on a single slide, a 100-year graph of the 10-year treasury. The chart, he said, tells many stories and shows long-term economic trends in the market. Most specifically, that interest rates have historically been between 2% and 4%, with the exception of a long-term period of inflation in the 1970s, and Penner believes that interest rates will once again return to a pattern between 2% and 4%.

According to Penner, the real challenge is that we have moved to a system where the Federal Reserve as opposed to the free market is dictating interest rates. This makes sense considering the seriousness of the most recent financial crisis. The government needed to aid the market and encouraging spending and borrowing. To do that, interest rates fell to all-time lows and have stayed there for decades.

He said there are two ways to fix the economy: lowering interest rates and encouraging borrowing. The result, is a slow growth economy with an exorbitant amount of debt. “That has been the story in America, and we exported that story to the rest of the free world,” said Penner. “We are approaching functional limits. We are at an interesting time. Low interest rates and high debt, which stifles economic vibrance, means very low returns, negative economic pressures.”

He used Japan as an example of a functioning low growth economy. “Japan foretells the story that we are in right now. Japan has been in a stalled economy for half a decade, we have bee n in it for half a decade. What is interesting is that Japan functions, and it is a fairly vibrant place.

While Penner offered a stark look at the market, it wasn't all bad news. Low interest rates are good for valuations, he said, and there are strong underlying fundamentals. “There are opportunities abound, and we are a point in real estate where there is a lot of value creators can do extremely well in the industry,” he said.

LOS ANGELES—Twenty years ago, interest rate predictions were never a topic of discussion in commercial real estate circles, and that it was because they were impossible to predict. Today, it is just the opposite, with CRE experts regularly discussing where interest rates are heading. This dichotomy was the topic of keynote speaker Ethan Penner's, founder and managing partner of Mosaic Real Estate Investors, kickoff speech at RealShare Los Angeles yesterday,

“Interest rates are everything,” Penner said in his speech. It is the measurement of how we drive relative financial assets, and real estate is a financial asset.” He focused the whole speech on a single slide, a 100-year graph of the 10-year treasury. The chart, he said, tells many stories and shows long-term economic trends in the market. Most specifically, that interest rates have historically been between 2% and 4%, with the exception of a long-term period of inflation in the 1970s, and Penner believes that interest rates will once again return to a pattern between 2% and 4%.

According to Penner, the real challenge is that we have moved to a system where the Federal Reserve as opposed to the free market is dictating interest rates. This makes sense considering the seriousness of the most recent financial crisis. The government needed to aid the market and encouraging spending and borrowing. To do that, interest rates fell to all-time lows and have stayed there for decades.

He said there are two ways to fix the economy: lowering interest rates and encouraging borrowing. The result, is a slow growth economy with an exorbitant amount of debt. “That has been the story in America, and we exported that story to the rest of the free world,” said Penner. “We are approaching functional limits. We are at an interesting time. Low interest rates and high debt, which stifles economic vibrance, means very low returns, negative economic pressures.”

He used Japan as an example of a functioning low growth economy. “Japan foretells the story that we are in right now. Japan has been in a stalled economy for half a decade, we have bee n in it for half a decade. What is interesting is that Japan functions, and it is a fairly vibrant place.

While Penner offered a stark look at the market, it wasn't all bad news. Low interest rates are good for valuations, he said, and there are strong underlying fundamentals. “There are opportunities abound, and we are a point in real estate where there is a lot of value creators can do extremely well in the industry,” he said.