Will Interest Rate Hikes Hurt Commercial Growth? by Lesley Hensell
In the 1900s, hot-button real estate and development issues included the conversion of farmlands to industrial centers and the correct pricing of capital through interest rates. From the crash of the 1920s and the Dust Bowl, to the explosion of industrial development during World War II, to the high interest rates and real estate crash of the 1980s, urban spread and construction financing continually surfaced as key issues. So what’s different now that we’re in the 2000's? Absolutely nothing. Lots of this column’s readers are fascinated by the arguments surrounding so-called suburban sprawl, also known as free-market development of real estate surrounding existing urban areas. No matter which side you take in the issue, you’ll surely appreciate a new smart growth Web resource developed by the National Association of Industrial and Office Properties (NAIOP). Check out the site at http://www.naiop.org/legislate/growth. The smart growth pages include several useful resources, including descriptions and links to state, local and national programs. The most fascinating area includes an overview of smart growth initiatives in 15 major markets, including demographic, regional governance and infrastructure finance information for each. At the site, you can learn about the core principles of smart growth, growth management techniques and proposed legislative initiatives. NAIOP also reviews federal activities relating to smart growth, including links to the web sites of various federal government agencies. “We believe that smart growth promotes economic prosperity and enhances the quality of life through measures that respect the importance of freedom of choice, flexible land uses and natural resource management,” said NAIOP President Thomas Bisacquino. Be sure and check of the full-text versions of the “Growing to Greatness” manual, as well as a report titled “The Flow of Money and Its Impact on Local Economies,” both of which are available online. These resources should be part of the decision-making toolkit for every state and local planning commission in this country. An on the financial front, of course we’ve all heard about the half-point hike in interest rates, which captured headlines in every daily paper this week. Most money soothsayers, including myself, have taken the view that these interest rate increases tend to harm capital-intensive businesses, including real estate. But at least one commercial real estate financier says that the half-point rise in long-term rates won’t “significantly” dampen enthusiasm within the commercial mortgage market. Real estate market fundamentals are the best they've been in a long time, according to Bridger Commercial Funding, a provider of long-term real estate capital to banks nationwide. “From a lender’s perspective, higher interest rates typically prompt a slowdown in borrower demand, often because of the pure psychological effect caused by the realization that the deal just became more expensive,” said Bob Schonefeld, CEO of Bridger. “However, we are still in a period of historically low interest rates.” Schonefeld backs up his argument by pointing out the fact that long-term debt for commercial real estate is still cheap since it benchmarks off the 10-year Treasury. Schonefeld said that regardless of the Fed’s action this week, there will still be solid demand for long-term mortgage debt. Although real estate transaction activity has been less than stellar, purchases did begin to pick up toward the end of last year. According to CB Richard Ellis’ National Real Estate Index, at the end of 1999 transaction activity turned the corner in the third quarter with $15 billion in property sales closed between June and September, up from $11 billion in the prior three months. | 
