Federal Reserve Cuts interest rates

In the past two months, the US Federal Reserve Bank lowered its benchmark Fed Funds Rate in an attempt to reinvigorate the US economy, which has been feeling the impact of sluggish global GDP growth. Major economies around the world have slowed, including China, India and the entire European Union. Germany, the economic heavyweight of the EU, actually contracted in Q2 [1] and that sounded the alarm for central bankers across the globe, prompting an aggressive shift in monetary policy to bring down the cost of borrowing.

Though the reason for these actions is concerning, it has been good news in terms of mortgage rates here in the US, as rates have fallen to historic lows. That’s good for borrowers whether they are refinancing existing properties or acquiring additional assets, and it opens new opportunities for you as a commercial property owner in Southern California.

More Buying Power

First off, lower mortgage rates increase buying power because they allow those acquiring commercial property to borrow more of the purchase price. The added leverage boosts projected internal rates of return and is likely to keep the lid on cap rate decompression for a while longer despite the fact that the current up cycle is now the longest in US history. When the US 10-year treasury, the key benchmark for setting mortgage rates, rose to over 3.2% late last year [2] , experts were sounding the alarm that cap rates could reverse course. But here we are just a few months later and the 10-year is back under 1.8% as the third quarter draws to a close. So, if you are a seller, that’s good news because a qualified buyer will be able to secure favorable financing to acquire your property.

Opportunity to Refinance

If you don’t have plans to sell, the news is still good. Perhaps you have a loan that must be refinanced soon.  If so, this is a good time to take action, as no one knows when rates will start moving in the other direction. Since property values remain high and loan-to-value ratios increase as rates fall, you may be able to access some of your equity with a cash-out loan along with meeting your obligation to pay off existing debt.

Improve Functionality

That opens up some real possibilities to enhance the performance of your investment without reaching directly into your own pocket, especially if you are faced with a list of deferred maintenance issues or elements of functional obsolescence that may be impacting the performance of your asset. Tenants these days are expecting more in terms of amenities and quality in return for the record-high rents they are being forced to pay to accommodate their plans for growth. In the office sector, this is especially true, as employers have become increasingly concerned about attracting and retaining good employees, most of whom are younger and insistent on a workplace experience they enjoy.

Increase Efficiency

Lower interest rates also benefit owners looking to increase the energy efficiency of their properties. Our company just installed a multi-million dollar solar system [3] at the Atrium building in Irvine. Other than property taxes, the cost to provide adequate power is our largest operating expense. With the upgrade, we will realize a substantial savings on power and make our available spaces more competitive in the marketplace, along with doing our part for the environment. We expect to recoup the entire project in just 7.5 years , and then permanently enjoy the benefits of lower energy costs. Reduced operating expense also increases the value of the property.

Time is of the Essence

How long will the current low-rate environment last? No one really knows, but taking action sooner rather than later increases your chances of securing favorable financing terms. The entire investment marketplace including equities and bonds (both corporate and sovereign) has been experiencing increased volatility. That makes bankers nervous, so even if rates stay low, underwriting criteria could tighten even if rates remain at current levels. So, if you have plans to refinancing, retrofit or sell your property in the near term, the time to act is now.

At the Kelemen Company, we have extensive experience as asset managers, property managers and principals who have stood in your shoes. If you are interested in exploring how you could take advantage of this low-interest environment, we are confident that we can assist you in that effort. Whether it’s securing access to capital, designing a plan to reposition your asset for maximum performance or create a disposition strategy, we have the knowledge and resources you need. Give us a call at (949)668-1110.

References

[1] https://markets.businessinsider.com/news/interestrates/german-gdp-contracts-in-q2-1028475311

[2] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2019
[3] https://www.linkedin.com/feed/update/urn:li:activity:6585601340360261632