Protecting Your CRE Portfolio From the Impact of Rising Rates
On January 31, 2018, the U.S. Federal Reserve agreed to hold the Federal Funds Rate at 1.25% to 1.50%, but there was little in the way to suggest it would not continue on its path toward gradual rate increases throughout 2018 and into 2019. The Fed also noted in late 2017 that it will begin reduction of its $4.2 trillion U.S. Treasury Debt and mortgage backed securities portfolio, which will require the U.S. Treasury to issue more debt to fund deficit increases.
The combined effect is that borrowers are likely to see higher interest rates for new borrowings. Rising rates will eventually have an impact on commercial real estate valuations, particularly in more sensitive markets. One of the best ways to protect against downward valuations is to understand the credit risk posed by your cash flow (i.e. commercial and industrial tenants) to protect against excessive erosion of net operating income.
Contact us at Tenant Risk Assessment to better understand this complex relationship, and see what we can do to help you protect your portfolio.