2017 Commercial Interest Rate Forecast
Jan 19, 2017
Donald Trump’s November victory has already had rippling effects on the economy. Economists and experts are readying themselves for an unprecedentedly uncertain 2017, and if the news cycle is any indication, things will remain unpredictable beyond President-elect Trump’s January 20th inauguration.
With that in mind, we’ve outlined some factors and scenarios that may impact U.S. interest rates, and therefore, those looking into commercial real estate investing in 2017 and beyond.
Factors that Impact Commercial Interest Rates
First, a bit of clarity on the relationship between market forces and commercial mortgage interest rates.
The Federal Reserve, or Fed, sets the U.S. federal funds rate, raising or lowering it based on a host of economic factors. While the federal funds rate is not directly tied to commercial mortgage rates, it impacts how much it costs for lenders to borrow funds, and lenders tend to pass that expense on to their customers by adjusting their interest rates.
2016 was filled with both national and international tumult, ranging from Brexit to a shift in U.S. leadership – let’s first wade through a few market factors and how they could impact commercial interest rates in 2017.
1. The Fed may continue hiking interest rates.
One question follows any interest rate hike by the Federal Reserve: “Will there be more rate hikes next year?” This question is just as relevant leading into 2017 as it was leading into 2016 – after all, President Obama is leaving a robust labor market, the U.S. economy is growing above trend, and wage growth appears on the rise.
With this momentum, probability is high that the Fed will raise interest rates in 2017, which would subsequently raise commercial lending rates.
2. International and U.S. interest rates may move differently.
Fed rate hikes and higher interest rates tend to snowball. However, although economic growth in Europe is improving, GDP and inflation remain disappointing; banks such as the European Central Bank will likely lower their own interest rates in 2017 – at the same time the Fed is increasing U.S. interest rates.
This simultaneous lowering of Eurozone interest rates alongside raising of U.S. interest rates in the U.S. would result in minor improvements on the dollar. However, commercial real estate investors should be aware of the Fed’s leadership changes in 2018 – increased commercial loan interest rates in 2017 could always level out or reverse under new leadership.
3. Trump’s agenda will have an impact.
Trump’s campaign promises were centered on extreme tax, trade, and immigration policies with potentially huge economic effects. Generally, markets have responded positively to his victory, anticipating his administration will benefit growth and inflation, though many economic experts are anticipating Trump will implement much less aggressive policies.
Nonetheless, slimmed-down versions will likely have a positive effect on the U.S. economy in 2017, allowing for interest rate hikes which would also raise commercial mortgage interest rates. Until this confidence-driven demand fizzles in 2018, a rosy economic outlook will encourage investors to embrace equities and alternative investments.
What to Expect in 2017
Some question marks still lie ahead for commercial real estate loans. For example, should Trump’s administration prioritize any individual piece of his policy agenda, near and long-term outlooks on interest rates can shift – but Trump isn’t the only question mark.
There are numerous international events which will prove to shape the economic landscape in 2017: Technology-driven labor displacement, China’s economic slowing, and the populist resurgence in France, to name just a few. Political volatility throughout the world might give the Fed enough reason to sit tight instead of adding more rate hikes and impacting commercial loan interest rates.
Let’s take a look at a few potential outcomes from this federal funds rate uncertainty.
1. The Good
In an ideal economic scenario, Trump successfully implements trimmed-down versions of his trade and tax policies. Meanwhile, international markets grow as Eurozone confidence resurges.
In this positive outlook, the U.S. economy could strengthen beyond 3.0%, prompting the Fed to hike more than expected – this would naturally raise commercial loan interest rates for traditional lenders.
2. The Just Fine
In the most lukewarm of economic scenarios, Trump’s isolationism and tariff plans lead the U.S. to withdraw from NAFTA. This would mark a huge policy shift, and the subsequent trade difficulties with China and Mexico would lower investor confidence.
The Fed would likely respond to this by holding tight on interest rates, rather than raising them – commercial mortgage loan rates would also remain consistent.
3. The Ugly
In a doomsday outlook, the nationalist movement started by Brexit and Trump victories in 2016 could spur wins Denmark, Italy, France, and Germany, which would impact stability of the EU. Meanwhile, should Trump also become bogged down in personal scandals while in office, he would be unable to implement any of his fiscal policies.
This scenario would drag down both international and U.S. markets, and the Fed would likely respond by postponing rate hikes, or even lowering rates altogether.
What does it mean for commercial real estate loan rates?
It’s no secret: We’re in one of the most uncertain international political climates in decades. The possibilities are seemingly endless – even commercial real estate experts have their own forecasts. Learning about how the market can affect commercial loan rates and the commercial real estate investing options you have at your disposal is the best avenue for successful real estate investing in 2017.