How the Rise in Interest Rates Could Impact Your Commercial Real Estate Project

Today’s 10 Yr. Treasury Rate is 2.70%. One year ago, last summer the rate was 1.66%. Do you need proof of its ascending trend? Click here:
http://finance.yahoo.com/q/bc?s=^TNX+Basic+Chart&t=1y

The 10 Yr. Treasury Rate dictates where mortgage rates are heading. I don’t have a crystal ball to forecast the future but there are a few facts I know of which would impact the trend.

1. The Federal Reserve is already acknowledging the need to put the breaks on “printing money”. Rates go up when the Fed stops inflating the money supply (or starts contracting the money supply).

2. At the current CPI rate of 2% (the U.S. government’s data on inflation rate) the government bond investors are making close to nothing in return. Thus, the shift to the equities market which took the S&P500 from 1,100 in November 2011 all the way close to 1,700 as of today. This represents a rise of over 35% in less than two years. Clearly a better deal for investors worldwide. If this trend continues more bond investors would be enticed to exit the bond market to enter markets with higher yields. This implies the bond prices would go down and rates would go up.

3. The official Treasury Bond market boom started in the early 1980’s. After 40 years there is little speculation that it will continue. Which means rates CAN’T get much lower but they can get much higher.

10 Yr Treasury Chart

What does this mean for Commercial Real Estate investors?  A rise of only a quarter of percent on their mortgage could be detrimental especially on higher loan balances.  A higher rate takes away from monthly cash-flow.  A higher rate minimizes the purchasing power.  A higher rate could possibly mean the difference between an approved loan and a denied one.  Think about it and if rates are important to you or your clients this may be the right time to be pro-active.

Note: We can help with financing of distressed or under-performing properties and foreign borrowers buying or refinancing a U.S. commercial property.  While our focus is multifamily properties, we do finance most major CRE asset classes.

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