As the Federal Open Market Committee (FOMC) continues to evaluate the New Year’s economic growth, all eyes turn to the Federal Reserve where, until now, interest rates have remained extremely low in order to stimulate the stalled economy. Anonymous Federal Reserve officers have been intimating through the press that this year, 2015, rates are finally going to be subject to change and the arrow will be pointing in a higher direction. —
Anticipation and discussion of the Federal Reserve meeting this week is on the minds of most investors. The Feds are expected to announce their intentions to raise interest rates or at least put the market on notice. Although the rates have not been raised since 2006, the writing is on the wall and the Fed Reserve is preparing to start the move towards increased rates. Regardless of industry speculation, the Feds will take the freeze off, maybe not in April or June, but they will eventually raise rates. Thus, as rates increase, the cost of funds increase and the amount of investment falls.
According to Diane Swonk, chief economist at Mesirow Financial, before the Feds start this upward trend "They have to be sure when they raise rates, they don't have to go back again. They are going to move very glacially." However, Fed Chief Janet L. Yellen has stated “If economic conditions continue to improve, as the [Fed] anticipates, [it] will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis”.
To understand further what this will mean to commercial real estate, we must understand the relationship between the economy, interest rates and commercial investments. As explained in Commercial Real Estate Finance World, “commercial real estate fundamentals and investor sentiment are generally pro-cyclical … because an improvement in fundamentals translates into greater net operating incomes for buildings in the future, all else being equal this should generate an increase in the value of the buildings….”. Thus, as the economy is stabilizing and our markets are increasing, the time has finally come for the FOMC to raise the interest rates.
One of the leading companies in enhancing financing options for investors is Pacific Capital, LLC. As International Real Estate Advisors and a CRE Consulting Firm under the direction of Pres. Jason A. Schuck, Pacific Capital is currently placing clients in exceptionally favorable financing programs. Their mission is designed for creating sustainable investments for the discerning investor. In this time of financial uncertainly, Pacific Capital has implemented a variety of financing opportunities and are advising clients how the coming interest rate increases will affect an investor’s portfolio. The team at Pacific Capital can also advise on when is a good time to float rates or if an investor should consider locking down the rates. Pacific Capital’s advisors are leaders when it comes to the analysis of the best plan of action to maximize portfolio performance and financing options.
“Currently, prudent investors across the United States are looking at their investment schedules for the first quarter of 2015, as many have concerns regarding the influence of future interest rates on their investment plans,” stated Schuck. “While there are many factors that come into play when considering financing options for investments, one of the most important questions to ask your team is to clarify the best time to lock in the interest rate on the next asset or financing project”.
Every investor should understand that in commercial real estate, even a nominal 1/4 point increase in the federal funding rate can equate to a significant decrease in an investor’s net cash flow and overall profitability. "When it comes to maximizing returns and cash flow, Pacific Capital has outstanding resources to facilitate the placement and implementation of your investment opportunities,” states John Christie, of The Arch Group. “Pacific Capital actively works with investors to be in the forefront of today’s investing issues, while keeping the client’s goals on track to reach exceptional returns and yields”.
As the current interest rates are under review by the Federal Reserve and economists are projecting an increase in the near future, timing is paramount to maximize returns and minimize interest rates. The advisors at Pacific Capital are preparing clients for the forthcoming increase and are planning appropriate exit strategies for investors. The time to lock in interest rates is now!
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