By Brandon Wilhite
Winter is coming! And so is another rate hike! At this December’s Federal Open Market Committee (FOMC) the Federal Reserve is widely expected to raise interest its benchmark interest rate by another 25 basis points, marking the Fed’s 4th rate hike in 2018 and its 5th in the last 13 months. Former Fed chair, William McChesney Martin, famously stated that the Fed’s job is “to take away the punch bowl just as the party gets going,” ostensibly to keep the party from getting out of hand.
While long-term interest rates (i.e., the 10-year US Treasuries) were largely unaffected by the Fed’s rate hikes in 2016 and 2017, thus far in 2018, they have ticked up largely in tandem with the Fed’s rising short-term rates. Had longer terms rates held flat, we would be dangerously approaching the dreaded inverted yield curve, which historically speaking, is a near certain indicator of a coming recession.
On the contrary, while rising interest rates certainly present a challenge with regards to both existing floating rate debt as well as new acquisitions and development, the bigger picture is that rising long-term rates can be seen as an indicator of a healthy economy. Rising construction costs and the continued discipline of the capital markets have held speculative real estate investments and developments to a moderate pace, despite the strongest economic growth in recent memory with GDP growth hovering around 4% and wage growth at 3%.
The Fed lowered its benchmark rate 7 times for a total of 350 basis points in 2008, and over the past 10 years, the market has grown accustomed to historically low-interest rates and ultra conservative demand and rent growth projections. In 2019, which expects to see another 3 to 4 rate hikes, the transactions that are able to attract capital will be the ones in which there is a defendable demand and rent growth story. While both sponsors and capital (debt and equity) should and will remain disciplined, the players who will thrive in this cycle will be the ones who can underwrite to the market growth story and position their investments to capture the growth.
Through our 26 year history, Metropolitan Capital Advisors has advised our clients and arranged capital in all market cycles. Our experienced team can help to formulate a capital strategy that is in alignment with the market and your business plan.
The author, Brandon Wilhite, is a Senior Director at MCA. Brandon can be reached at 972-267-0600 or firstname.lastname@example.org.