We have been hearing a lot for a long time that interest rates are going to be on the rise.  In fact, in early summer, we did see a jump in the prime rate.  However, the Federal Reserve has not moved yet to increase the rate that it charges to banks.  It is anticipated that this will happen soon, perhaps as early as next month.  The Federal Reserve has kept its interest rate near zero since 2008 to keep lenders lending and borrowers borrowing.  In the early years of the recession, this did not seem to work on real estate loans which were, for the most part, not being made.  However, loan activity has been building in recent years.

We saw a lot of real estate loan activity so far this year.  Many borrowers looked to close new acquisitions or refinancings before the interest rate increase.  A small increase in the interest rate can have a large impact on the bottom line for an income generating property.  Some loans provide for an interest rate lock at the time the loan commitment is signed.  Clients ask whether or not they should rate lock right away or wait another few days or a week.  Short term swings in interest rates (that is, swings between today, tomorrow, and next week) are difficult if not impossible to predict.  In general, interest rates are expected to rise and the Federal Reserve is expected to increase its rates, leading to an increase in the rate that banks charge borrowers.  However, it is possible for rates to have some short term fluctuations making yesterday’s rate higher than tomorrow’s rate.

So, if rates jump a half a point or more, will the real estate market contract as a result?  Some clients have refinanced their loans well in advance of their original loan maturity date.  I expect that option to become less attractive this fall and to see some fall off of refinancings.  A property owner has to factor in the cost of refinancing, including any prepayment penalty, and compare that to the interest payment savings of refinancing.  However, for new property purchases, we have seen cap rates being compressed.  This is especially true for triple net properties with tenants with high credit ratings.  The increase in the interest rates could be balanced by rising cap rates.