Investors Growing More Confident, But Continue To Watch the Fed on Interest Rates

Federal Reserve Chairwoman Janet L. Yellen told Congress Tuesday that the Fed still sees a need for its stimulus campaign while warning that the end is approaching. She said it is still concerned that despite the overall economic improvement, too many Americans continue to be unemployed or underemployed and wage growth is sluggish. She also noted that the Fed will not act until it “is reasonably confident that inflation will move back over the medium term toward our 2% objective.” Based on her remarks, it looks like the earliest interest rate hike would not be until the Fed holds its scheduled meeting at the end of July — if then.

Her testimony before the Senate Banking Committee comes at a time when commercial real estate (CRE) investors are gaining confidence about acquiring assets that is being spurred on by both attractive financing and steady rent growth in the marketplace. According to a recent article from Urban Land magazine, multifamily should continue to lead investment activity, especially in transit-centric locations, followed by industrial properties, hotels, office and retail.

CRE investors are seeking asset choices in a growing number of markets in their quest for even more attractive yields. With interest rates not ready to rise in the near future and cap rates even in many secondary markets continuing to compress, worrisome negative spreads are being created in some larger markets for the first time in some years. And while new construction has picked up in a few areas, this new inventory isn’t likely to offset positive absorption trends.

However, as CRE fundamentals continue to improve, some are wondering if increasing investment flows will create conditions that will lead to the return of the pricing bubble?

This is the same question that was recently explored on, noting that the interval between downturns has increased to an average of 105 months per cycle; we are now at 63 months, only a little more than half way through the average historical cycle.

At the same time, there is greater discipline in the markets today. Both the standards for lending and underwriting have returned to a more rational state. A slow, prolonging recovery is good for everyone, making the market easier to understand and more attractive for buyers and sellers to make informed decisions.

Current data doesn’t indicate any bubble activity. While some markets look expensive, there are still good values to be found for investors looking away from some of the more traditionally popular markets and returning more strongly to the secondary markets. There are still many good values to be found.

Looking back two to three years ago, all of the value creation was cap rate compression. Now, however, we see real growth in net operating income because of legitimately improved fundamentals; we can see rent growth of 3-5% or more this year and up to 15% in multifamily. This is plenty of good news for everyone in the CRE market — buyers, sellers, owners and investors.

With offices in New York, Massachusetts and Connecticut, our investment sales teams at Northeast Private Client Group are well-positioned to support commercial real estate investors looking at opportunities across the region. If you’re a property owner or an investor in the mid-market segment and want to discuss the content of this blog or your investment goals for next year and how we can help you achieve them, please give us a call. We look forward to listening and sharing our knowledge with you.