Strategies in a Rising Rate Environment

Written by: Shawn Hill Posted: 7/10/2018
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Although the Fed is likely to implement at least two more increases to the federal funds rate before year end, the financing markets are on solid footing and borrowers should still find rates to be very attractive, historically speaking. Considering none of us have a crystal ball on where rates will end this year, a more constructive approach is to focus on the facts and that which we can control, in order to map out a strategic game plan and isolate the variables of uncertainty going forward. Below are some key points for borrowers to consider to help formulate a game plan in a rising rate environment:

  • Healthy Lending Environment: Different than the recession, the current lending environment is healthy and favorable for borrowers. The capital markets are currently firing on all cylinders and there are many options for borrowers seeking debt, including conventional bank loans, credit unions, CMBS, life companies and the SBA. Now is a good time to consider refinancing options on loans that will mature in the near term.
  • Rates Are Still Low: No matter how you look at it, rates are still historically low. For those refinancing 10-year loans originated in 2008, current rates will still be attractive relative to the existing rate in place. For those completing acquisitions, it may be prudent to run a stress analysis on floating rate deals assuming some upward rate movement to ensure the returns are still within expectations.
  • Strong CRE Fundamentals: Commercial real estate fundamentals are solid at this time, generally speaking. This will resonate with self storage owners who know that self storage rents and occupancies are robust, complemented by proven recession-resistant demand characteristics for the product. Going forward, rents and occupancies may be challenged by new supply entering the market from this construction cycle.
  • Gradual Increases, Not Spikes: Although the Fed has finally made good on its promise to begin raising interest rates, thankfully they have been very forthright in telegraphing their plan. The policy thus far has been to foreshadow these increases giving the market time to absorb the increase. This trend looks to continue.
  • Inflation Is Not All Bad: During inflationary periods, property owners benefit from an ability to push rents, resulting in increasing net operating income (NOI). This is only magnified in self storage; the inherent nature of short-term leasing affords investors the flexibility to quickly and frequently adjust market rates through prudent revenue-management practice.

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