Last week the federal Reserve announced its interest rate guidance for the current period and for the remainder of the year. Back in December the federal Reserve increased short term interest rates by 1/4 of one Percent. At the same time chairman Powell also forecast three rate increases for 2019. In a stunning reversal, the federal Reserve is holding rates steady and is forecasting no further increases in 2019.
Last week the Bank of Canada also announced that it was holding rates steady.
The European Central Bank also has kept rates study at essentially zero or negative interest rates.
All of this is against a backdrop of slowing economic activity on a global basis. The growth forecast of the US economy has been revised to 1.75% to 2% this year, down from the last estimate of 2019 growth at 2.25%.
Central bankers have been using interest rate policy to engineer the so-called soft landing. Briefly raising interest rates would prevent the economy from overheating. It would also give the central bank a tool with which to stimulate the economy should it slow down.
Europe has lost the ammunition to stimulate the economy. By maintaining rates low, they have nowhere to go. Printing money is the only tool they have left. They’re going to try it, but it hasn’t worked so far. I see no reason for it to work now.
Here in North America, all of this is good news for real estate developers. One of the biggest risks that we face as developers is the uncertainty of interest rates once a construction project is completed. However, a period of interest rate stability makes it much easier to budget and model in the future. Construction projects are typically funded by construction loans only during the construction phase. Upon completion of leasing, the projects are typically refinanced into permanent fully amortized loans. Without knowing what interest rates will be in 18 months time when the project completes, it is difficult to forecast the operating model for the project with permanent financing.
Now is the time to take advantage of these low rates and lock into permanent financing for as long as you can.
