Lower Rates Raise All Boats

The Federal Reserve voted not to drop the benchmark rate at its June meeting, but the commercial real estate market will still be largely interest-rate driven for the remainder of the year, says Calkain's Jonathan Hipp.
Jonathan W. Hipp  Image courtesy of Calkain Cos.

There’s an old saying about asking four experts their opinion and getting five different answers. That old saw could be applied to economists trying to get ahead of interest-rate activity as we swing into the second half of 2019.

Do a simple Google search on interest rates to see this truth in action. Unfortunately, you’ll need a sharp machete to cut through the political wrangling masquerading as guidance.

As you might recall, it wasn’t all that many weeks ago that those same pundits were wringing their hands over a probable increase, or series of increases, in the interest-rate picture. Forgetting for a moment what might―or might not―lie ahead, and living in the moment, the 10-year Treasury is now at a near-record low of 2.06 percent―it’s lowest since September of 2017.

This of course bodes very well for real estate generally, but also for the net lease market, which is our reason for being. Large deals are capital magnets. But smaller deals often have trouble finding the funds to push them over the finish line. Lower rates raise all the boats, making it easier for everyone to belly up to the bar. In fact, we expect to see a slight surge in activity as transactions that had difficulty penciling out just a few weeks ago now find their paths to completion cleared. We also expect to see a jump in lenders offering interest-rate-only loans―more good news, especially for those smaller deals.

This is more than wishful thinking. In fact, a sizable deal we’re working on with a life company, drew an actually quoted rate in the high 3s just a few days ago.

This optimistic turn might well be fueled further if tariffs being imposed by the current administration do in fact threaten the stability of the economy, as some pundits have suggested. In that case, if I were a betting man, I would say there’s a high probability that we might see a further compensatory drop in rates by the end of the year.

Yes, this might seem like good news stemming from bad, but I have faith in the strength of the economy and the ability of those with their hands on the tiller to not sink the ship in the name of politics. In the meantime, we’ll reap the benefits.

So I am going out on a limb here and foreseeing a continuation of a strong interest-rate-driven market through the end of the year.

Essentially I am doing the pundits one better. How? Well, you know what else they say about economists. . . They’ll give you a direction or a time frame but never both.

I’ve given you both. That’s the story. And I’m sticking to it.

Jonathan W. Hipp is founder, president & CEO of Calkain Cos.