Federal Reserve Rate Hikes and Their Impact on CRE

In 2022 the Federal Open Market Committee (FOMC) raised rates by 75 basis points four times, and then closed out the year with a 50-basis point increase in December, bringing the federal funds range to 4.25% to 4.50%. At the last FOMC meeting in December, the median projection for the federal funds rate in 2023 was 5.1%, with the expectation that it will taper down to 3.1% by 2025.

These rate hikes generally have more of an impact on short-term and adjustable-rate loans than long-term, fixed-rate loans. Treasury yields, which are viewed as a sign of investor sentiment and help determine mortgage rates, are low and aren’t expected to skyrocket in the near future.

Certain asset classes and property types are more susceptible to rising rates than others, but multifamily and industrial properties seem to be faring best in this ever-changing environment. Demand is still outpacing supply in many sectors and markets and new properties are still being developed in growth markets across the country, indicating that there are good opportunities for investors available. The due diligence period is paramount in this time of uncertainty and investors are encouraged to perform a more detailed analysis on subject properties.

In time, the market will adjust to a new level of interest rates, but the unpredictability of cash flow and yields until then will make for a tedious transition. Although there are more rate hikes on the horizon, investor sentiment should be positive since the last hike was only a 50-point increase, indicating that inflation is slowing.

Justin Langlois, CCIM is a Commercial Real Estate Investment Advisor with Stirling Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.