Federal Reserve Raise Interest Rates

As many real estate professionals expected, the Federal Reserve increased interest rates to a range between 1.25 and 1.5 percent. This is the third increase of the year with the last one coming in June.

The chief economist at Jones Lang LaSalle (JLL), Ryan Severino, expressed his minimal concern by stating, “We have been hiking rates for the last two years with no discernable impact on commercial real estate. That is because the economy continued to grow quickly enough over the last two years to support real estate even in the face of rising rates.”

That is not to say Severino doesn’t have his reservations. He highlighted the fact that rates increasing too quickly could stall economic growth and do considerable damage to the commercial real estate sector. In addition, as interest rates continue to rise, the cap rate spreads will continue to compress. Having said that, industry pundits believe the economy is strong enough to absorb the rate increase. 

According to reports from the Wall Street Journal, rates will continue to slowly increase in the coming term(s) with officials planning three quarter-point rate increases followed by hikes in 2019 and 2020. The projections for 2018 remain positive, as bank officials expect the U.S. economy to grow by 2.5,  and continue growing through 2020.

Chair of the Federal Reserve, Janet Yellen, offered her confidence in the projections and growth in a news conference, “The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years we’ve seen this… I feel good about the economic outlook.” She also provided reassurance by noting the economy’s growth is not built on a massive amount of unsustainable debt, unlike another not-so-distant time of economic growth.

Click here for more information on rate increases and upcoming term projections:

The Wall Street Journal: Fed Raises Rates, Sticks to Forecast for 2018 Increases

Board of Governors of the Federal Reserve System press release

AXIOMetrics – Market Trends

Last week, AXIOMetrics, a market research company that provides strategic insight reports for real estate professionals, published research detailing November market trends for apartments.

According to the report, “A signal that the national apartment market may be on the road to strengthening in 2018 was sent by November’s performance figures, which showed that annual effective rent growth increased by 21 basis points (bps) to 2.3%. ” This figure stands out because it is only the third time in the past seven years rent growth increased from October to November.

New York, Seattle, and Dallas are metros we are used to seeing toward the top of performance lists, but it is their smaller, surrounding sister cities that have been demonstrating strong numbers. For example, when comparing New York and Long Island, the difference in annual effective rent growth is very apparent. Long Island has averaged 3.8% annual rent growth since 2015. Even though that is middle-of-the-road performance on a national level, it is 250 base points (bps) above New York’s  1.3%. A similar pattern is found when comparing Dallas to Fort Worth and Seattle to Tacoma. 

“To use an age-old axiom in the real estate industry, location certainly does matter. And while not every company’s strategy best aligns with locating in adjacent markets such as these, it should also not be discounted either, as there is potential there for success on a property-by-property or a portfolio-by-portfolio basis.”

AXIOMetrics’ market trends report is filled with useful statistics and visual aids that could affect property and investment strategies, so a personal analysis of the information is advised.

Click here for the full report: AXIOMetrics November 2017 Market Trends

 

United State of America

Tax Reform Advances

Late last week, the Senate passed the proposed tax reform legislation that is set to have a large effect on every taxpayer. Now, the House and Senate will have to hash out reform differences. According to a recent National Multifamily Housing Council (NMHC) article, despite numerous differences between the House and Senate proposals, both leave many critical provisions relevant to multifamily intact. For example:

“Both would allow multifamily firms to continue to fully deduct business interest and engage in like-kind exchanges. Notably, the House bill also maintains 27.5-year depreciation for multifamily buildings whereas the Senate bill extends the recovery period to 30 years for firms wishing to maintain full deductibility of interest. Initially, the Senate sought a 40-year depreciation period for buildings, but NMHC/NAA were able to secure an amendment during committee markup offered by Finance Committee Chairman Orrin Hatch (R-UT) to reduce the period to 30 years. Notably, the Senate bill would require firms wishing to opt out of interest deductibility to depreciate existing buildings over an additional 2.5 years.”

One point the House and Senate differ on is the pass-through rate. Under the House’s proposed bill, multifamily firms will see a portion (30 percent or more depending on capital intensity) of their business income taxed at 25 percent. The Senate’s proposal, “individuals could take a 23 percent deduction on a portion of pass-through income that would generally be limited to a partner’s share of wages paid by the underlying business.”

These are only a few of the possible changes among a vast amount of proposed alterations to the nation’s tax code that could have an adverse effect on the multifamily industry and many others. And with the wheels still in motion and more proposal revisions to come, the aforementioned reform figures are subject to change. So if you’d like learn more detail about the upcoming tax reform and how it could effect you, your investing, or multifamily, click this link for the NMHC article and their related posts: Republican Tax Proposal Nears the Finish Line