By: Rebecca Rockey, Economist
On December 16 the U.S. Federal Open Market Committee (FOMC) voted to raise the federal funds rate for the first time in almost a decade. This initial rate hike—only 25 basis points—is largely symbolic, and the action is just the first step in what will likely be a very lengthy process of monetary policy normalization.
After a late summer slowdown, job growth re-accelerated in October and November, with more than 500,000 net new nonfarm payrolls added during those two months alone. Many other downside risks to economic growth receded—wage growth has been trending upwards for the past three months, global financial volatility has declined and diminished industrial production has been manageable. It was just the right combination of events to re-instill confidence in the FOMC members that the economic fundamentals propelling the current expansion are solid and that unemployment and inflation will continue to improve.
Like every other asset class, the commercial real estate sector has benefited from the Fed’s massive injection of liquidity into the economy over the past seven years. However, unlevered NCREIF returns are much more correlated to the combined forces of economic growth and job creation than to the 10-year Treasury rate, let alone to the federal funds rate. Occupancy and values have risen tremendously throughout historical tightening cycles.
In general, the Fed’s decision is not something that the commercial real estate industry should fear. To a degree, it is something that should be celebrated.
Click here to find out why commercial real estate prices and returns will continue to rise even in a rising interest rate environment.
Becky joined Cushman & Wakefield in January 2014 as the U.S. Economist. Before joining Cushman & Wakefield, she worked as a consultant at a finance and economics consulting firm in the DC area, primarily working on loss forecasts for a national housing finance company’s single-family, fixed income portfolio. Prior to that, she was a junior economist at the Congressional Budget Office for three years in the Financial Analysis Division.