Is The Fed Telling You to Sell Your Building Now?
The Federal Reserve has outlined plans to accelerate its effort to move toward a more normalized monetary policy following nearly a decade of easing. There is no doubt the ‘normalization process’ will put upward pressure on long-term rates. That will ultimately impact the value of real estate assets. I wanted to write about this issue because I often hear sellers say they want to hold on to their assets for a little longer to maximize their exit strategy. The fact is, now may be the right time to sell, before the window of opportunity closes in response to the Fed’s upcoming actions. Once the Fed slows down its acquisition of long-term debt, long-term rates will jump.
Rising cost of capital could weigh on investor activity. The majority of commercial real estate investors expect a modest increase in interest rates over the course of the year, pushing up the cost of capital, according to a recent Marcus & Millichap report. While commercial real estate fundamentals remain strong, rising costs associated with debt financing will tighten the spread between cap rates and lending benchmarks. This environment could weigh on transaction activity as investors evaluate their yield options. Cap rates have remained relatively stable over the last year, but upward movement in Treasury rates has amplified the expectation gap between buyers and sellers. As buyers may choose to sit on the sidelines, the lower demand for assets will take a toll on property values. My advice is to sell now or be prepared to have to hold on to your asset for several years until the next cycle can fetch higher yields.