The Federal Reserve’s recent commitment to keep interest rates low the next two years delivered a surprise gift to real estate investors. This policy to keep both short and long term rates low has eliminated the threat of higher borrowing costs and thus, reduced pressure for sellers to lower prices to provide higher returns to compete with higher risk free rates.
This pricing support has come at a much needed time for many investors holding properties that are just starting to recover from the great recession, and concurrent drop in valuations. With CAP rates continuing to drop along with interest rates, sellers are finding some demand at lower CAP rates then the recent past. This is underpinning valuations for all commercial real estate.
Most economists had expected the Fed to slowly raise interest rates in 2012, which would have forced real estate sellers to lower prices, weighing down commercial valuations across the board. The surprise announcement that the FOMC would keep the federal funds rate at between 0 and .25% until mid-2013 removed this uncertainty.
But is it a good thing? On the surface, most experts agree that this effort by the Fed will help keep commercial real estate values from dropping further, and may spur a gradual increase in valuation. Some, however, fear that buyers of class A properties in strong markets will overpoay, and start new asset bubbles in select markets.
What everyone does agree on is that this latest move by the Fed will support Commercial real estate transaction activity through 2013.