For more than six years the US Federal Reserve has kept interest rates down to stimulate spending but this era has to come to a close, warns entrepreneur Jorge Newbery, and lifting the lid will hit commercial real estate values.
Writing in the Huffington Post, the founder and CEO of American Homeowner Preservation LLC, cites the recent sale of Chicago’s Willis Tower – for a record price for a commercial building outside New York – as a new benchmark in the era of low interest rates that has prevailed since the financial crisis.
Newbery describes the Willis Tower (pictured) as a ‘108-storey bubble on the city’s skyline’ that epitomises ‘the easy money years’ that eventually have to end.
In late March, Federal Reserve chairperson Janet Yellen declined to give any details about when interest rates would start to climb again.
Ms. Yellen’s refusal to specify when interest rates are likely to rise is understandable; the long-awaited improvements to the economy have not materialised and the latest employment numbers have been disappointing.
After a year of reasonably positive job growth across the country, the market came in with the lowest number of new jobs since December 2013.
Most analysts still believe that the economy will get back on its feet and that interests rates will rise. When this occurs, Newbery says, the current commercial acquisition spree is likely to come to a halt.
The big push on commercial real estate has meant that prices have been rising to ever-higher rates, both in the United States and in other locations worldwide.
US investors have turned their attention to European properties at the kinds of levels that are approaching the peak seen in 2007. This is, in part, due to the feeding frenzy in the US that has pushed prices up so quickly that investors have to look across the Atlantic to find good deals on real estate.
When the Fed finally lifts the artificial lid it has placed on interest rates, the value of commercial property will drop by a rate of between 8-19 per cent, according to Real Capital Analytics.
This prediction is based on an assumption that sub-2 per cent 10-year Treasury bond yields will normalise at a much healthier 4 per cent. As the cost of taking on debt increases, property income will decrease and values will fall. Other asset classes will lose value as the Fed increases interest rates to keep inflation under control.
