Interest Rates Are Heading Up. Here’s What to Watch.

Josh Campbell

At the beginning of November, the Fed announced that it would begin tapering its $120 billion per month asset purchasing program by $15 billion monthly. The pace of that tapering will remain closely watched over the coming year, as the Fed will continuously be juggling its dual goals of bringing long-term inflation to 2.0 percent while supporting the recovery of “full employment.”

While the post-COVID economic recovery has been quick, a number of predictions continue to miss, from inflation rates to the pace of job growth. For real estate investors, two things appear clear. First, that interest rates will rise in the intermediate term—though the pace at which that happens is still unclear—and second, that the asset class will continue to offer a strong hedge against inflation. Here are some key factors to watch in the coming months, along with several considerations for investors managing their portfolios.

What should investors be watching?

• The pace of tapering: If the Fed tapers bond purchases at its stated $15 billion per month rate with no adjustments, the program will end in mid-2022, which will likely be the triggering event for interest rates to slowly begin increasing.
• The labor force participation rate: With the Fed’s stated focus on achieving “maximum employment” and the labor force participation rate still well below pre-COVID levels in spite of the fact that enhanced unemployment benefits have ended and schools have broadly reopened, what the Fed’s role in stimulating labor force participation and growth remains to be seen.
• The wage growth inflation rate: The Fed has largely dismissed concerns about inflation, which was just reported at 5.4 percent year-over-year, as driven by transitory factors, including supply chain bottlenecks. Wage growth is much stickier and can drive longer term inflation, which could pose challenges for the Fed’s low interest rate environment in the coming years.

What do real estate investors need to consider?

• Current leverage ratios and rates: Many investors have been on the sidelines during this unprecedented economic environment, waiting to make decisions to sell or refinance their properties. For investors with loans several years old, even if their term is still 12 to 24 months from expiration, they should consider whether to do a cash-out or rate refinance while rates could be at their lowest point.
• Exchange or portfolio diversification opportunities: Investors with strong concentration in a single geography or asset class may want to consider diversifying their portfolio. The 1031 exchange provision has survived the latest versions of the Build Back Better proposals currently being debated in Congress, so taking advantage of an exchange opportunity while rates are historically low, and many lenders are getting increasingly competitive, could provide additional risk mitigation and inflationary hedges.

While interest rates are projected to remain near historic lows for the immediate future, 2022 could be a pivotal year. Real estate investors should be closely monitoring their portfolios and taking advantage of current market conditions and rates, whether they are in a position to buy, sell or refinance. The debt markets are expected to remain quite busy through the end of 2021 and into next year as investors continue to capitalize on the favorable lending environment while it lasts.

Josh Campbell is managing partner at Four Pillars Capital Markets.