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  • Writer's pictureKyle Nagy

Many believe higher and for longer

Many believe higher and for longer. If you do not have time to read the entire article, allow me to extract and apply the relevant.

Why focus on interest rates?

"Because interest rates are a lynchpin to how anything in the commercial real estate industry works."

How did we get here?

"There were extremely low rates coming out of the General Financial Crisis or Great Recession... with an eye to stimulating the economy for more than a decade. And just as the economy became healthy enough to withdraw such supports, the Covid-19 pandemic hit and the Fed needed to return its policy rates back toward the zero bound."

Those days have passed, what is next?

"Even if inflation comes back down to a roughly 2% on average over time, chances are low that interest rates will return to pre-pandemic, or pre-inflationary run-up, rates."

What would cause another period of historically low interest rates?

“Only in the case of another global catastrophe – economic, political, environmental, or public health – would rates return to the level persisting for the past decade or so. That’s not a ‘normal’, new or otherwise, to be expected.”

What can we expect as "normal" rates for the next extended time period?

"Treasury notes should be between 300 and 350 basis points above consumer inflation. Private market rates should require a further premium of 250 — 400 basis points, depending on the risk profile of the assets.”

Let's do some math.

Index + lender premium = loan interest rate

Treasury Index (3.00% + 2.00% inflation goal) + 2.50% (lender premium) = 7.50% best case scenario for lower risk transactions.

If inflation remains elevated and lenders perceive more risk in the market, rates can be higher.

Makes me feel better about the 6.80% rate I recently delivered.

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