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Wednesday's quarter percent interest rate increase by the Fed, while minor and long expected, could precipitate a flurry of sales in the real estate market, with owners looking to capitalize on peak values and buyers eager to take advantage of a diminishing window for low fixed financing rates.
"You may see more product go on the market for sale," said Mitchell Rechler, a principal at R Squared LLC, a firm involved in developing and redeveloping commercial property. "Just from the standpoint of inventory, that will result in prices coming down."
Fears that value--which flourished during the past four years of rock bottom rates--could now wane in the face of the expected succession of rate increases and also the possible surge in supply, have been checked by the burgeoning strength of the economy and the expected tremendous resultant demand. "I think prices will ease, but they won't ease that much because there's a great need for space right now," said Larry Feldman, president of Feldman Equities, which specializes in redeveloping enclosed regional malls. "Interest rates may rise, but there's so much money coming into real estate, it will make up for it."
Although rising interest rates are generally bad news for the industry, those who took advantage of the recent economy-spurring levels can reap substantial rewards. If rates rise rapidly, a low locked rate can become a glaringly positive asset, especially to a potential future buyer. "This happened in the 70s when there was a huge round of inflation, a lot of guys became instant gazillionaires because they locked rates down at 5 percent and inflation took rates up to 20 percent," Feldman said. "Offering financing like that for a property gives that property a huge increase in value."
Even though Feldman was quick to enunciate the unpredictable nature of rising rates, Rechler speculated that they could climb into the high single digits within two years, with the presidential election preventing significant hikes before this year's end.
Rising interest rates won't help the increasingly expensive construction and materials costs of new developments. The price of steel, concrete and labor has steeply gone up despite the low inflation of the last few years. This rising cost of development, combined with the increasing rates, has put a damper on creating new inventory.
"Existing assets certainly are more favorable now than building new ones," said Steve Cohen of Sonnenblick and Goldman.
"It translates into stiffer rents," Rechler said. "The question is if there's enough demand. That's the balance we live with in real estate. You have low interest rates in a softer economy, so a project may be feasible. Now you have higher interest rates in a stronger economy so you hope that the trade-off carries you through a project."
Because carrying costs such as construction loans are going to be more costly, and the lengthy time frame of development subjects investors to higher future rates, building new inventory may take a backseat to repositioning properties.
Regardless of these consequences, the industry seems unanimous in its confidence that Greenspan is correctly tailoring rates to keep pace with the economy.
"Greenspan is playing it just right," Feldman said. "He's letting the economy run up and he's slowly moving rates to follow. I'm optimistic."
It's a question of how fast the estate market will respond to the strengthening economy.
"Historically, real estate lags behind the economy," said Gary Gabriel, executive director of Cushman & Wakefield in New Jersey. "As jobs continue to perk, it's going to take a little time for that to translate into demand for more office space."
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