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US interest rate hike: ‘It’s a non-issue at this point’

The change is not expected to affect the real estate market in the short term but could be a concern for core and core-plus investors, industry insiders said.

The Federal Reserve unanimously voted to raise interest rates Wednesday for the first time in a year and the second time in a decade in a widely-anticipated move.

The rise in the Fed's interest rate from a range of 0.25 to 0.5 percent to a range of 0.5 to 0.75 percent was already underwritten into deals, and so would have little impact on investment activity in the short term, industry observers said. Forecasters predict more small rate hikes in 2017, though the surprise election of Donald Trump has thrown pre-election interest rate forecasts and other economic predictions into question.

Ronald Dickerman, president of New York-based Madison International Realty, told PERE that the change was “a non-issue at this point.”

“This rate increase is going to have virtually no impact because [mortgage] rates have already responded,” he said, noting that mortgage rates started rising three months ago. “I don't think people are nervous. Everyone expected a 25 basis point increase. If it was higher, it would have been a surprise, but if there was no increase, it would have been a surprise.”

Investors most likely to feel the effects of the interest rate increases are those that target core and core-plus strategies, since those that focus on value-add and opportunistic assets typically underwrite interest rate and cap rate expansion into their investments, said John Sweeney, a vice president at New York-based placement agency Park Madison Partners. However, additional interest rate hikes in the coming year could also affect exit prices for value-add investments if higher interest rates cause a larger-than-expected rise in cap rates , he said.

Dickerman agreed, noting that rising interest rates would likely hurt investors in the single-tenant net lease space in particular.

“This could affect long-term flat leases,” Dickerman said. “Anyone buying a Walgreens lease, a Costco or similar property with limited upside could lose real money because of an uptick in inflation or interest rates.”

Chicago-based LaSalle Investment Management additional rate hikes in its 2017 outlook report, released Tuesday. “The pace of these increases will be greater if economic growth accelerates due to new fiscal policies,” the report said. “A Fed shift, along with higher growth, will impact domestic and global markets, long-term interest rates and real estate capital markets in particular.”

LaSalle also said that rising interest rates could help “bring discipline to the supply side and rein in overly-aggressive capital markets.”