Interest Rates Could Move Upwards of Fifty Basis Points Before They Pressure Capitalization Rates

Mar 16, 2017
by Brian Klebash

NEW YORK, New York – At a recent conference in New York, an expert claimed that the frenzy created by interest rate hikes could be blown out of proportion. Jonathan Winer, Senior Managing Director and CIO at Seavest, spoke at The Sixth Annual Greater New York Healthcare Real Estate Summit on January 31, 2017. Winer said that interest rates would need to increase upwards of fifty basis points before they would put upward pressure on capitalization rates. Winer said this should ease investor concerns with ongoing talk of interest rate hikes.

Daniel McNulty, Managing Partner at Brookfield Financial, also spoke at the conference, pointed out that compared to other sectors, healthcare is in a safe zone and he continues to believe there will be some downward pressure on capitalization rates for the short term. Benjamin Hatz, Vice President of Acquisitions with ARC Healthcare Trust, also spoke and said that the healthcare sector is becoming a core sector in the real estate space and should be taken seriously. He said at $4 billion, the healthcare sector is a real player in the national markets.

The Federal Reserve is expected to increase the short-term interest rates by 25 basis points. Federal officials are signaling two more hikes hikes year, for a total of three in 2017. The hikes will narrow capitalization rate risk, but not to an extreme degree, according to the experts on the panel. Most agreed that there has already been a good deal of capitalization rate compression this cycle, and as the Fed starts to raise rates there is still some room for spread, so many developers don’t think we will see a lot of downward pressure on capitalization rates this year. Until we start to see more clarity from government policy, consensus is that we are going to see more of the same flat capitalization rate environment going forward.

Capitalization rates in suburban office markets increased on both stabilized and value-add properties, a recent CBRE report found, but in the first half of 2017, about 25 percent of markets are forecast to see a modest increase in capitalization rates of 1 to 24 basis points, while suburban office capitalization rates rates are expected to widen in approximately 60 percent of markets.

Multifamily capitalization rates rates broadened in the second half of 2016. Yet, about half of the multifamily markets will experience 25-basis-point increases to capitalization rates rates at some point in 2017. The remainder are forecast to remain stable. Value-add projects will be better suited to return investor profits at this point in the cycle. Los Angeles is named as the only market expected to see capitalization rate compression in 2017.

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