The FOMC raised the target federal funds by 25 bps earlier this month to a range of
1.75-2.00 %, and projected a third and fourth rate hike later this year, read that to be Sept and Dec. This sending the prime rate to 5%, and jacking up variable rate loans by ¼ point. The Fed cited increased retail sales, even excluding gas station fuel sales, and unemployment remaining below 4% as cautionary indicators of increasing inflation pressures – the May core CPI inflation was at 2.2%.
And what was the credit markets response to this? Not much! This was so highly anticipated that the event itself was a yawner. Although over in the bond market investors took notice, and flattened the yield curve a little more – not yet flat, but flattening.
But as real estate investors, what does this mean to us? A couple things to note. Historically flattening yield curves were a harbinger of recessions, this going back to at least the ’70s. 100% predictive? Of course not, but significant enough to take notice. What else? GDP contracts, unemployment increases, rents not locked in fall, and those long term leases with escalations are re-negotiated, or tenants walk and vacancies increase. To counter-act the above, the Fed historically reduces interest rates to stabilize the economy.
Whether you own commercial real estate or think you want to own real estate, how you position yourself at any particular time will determine your outcome. We structure financing to mitigate your risk and facilitate your reward.
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Michael Green is a Commercial Loan Originator for the Counsel Mortgage Group®, LLC.
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