Fed's Rate Hikes Starting to Affect CRE Loans.(Federal Reserve, commercial real estate)

High interest rates are finally starting to cause commercial mortgage borrowers to pause, according to two recent commercial real estate market surveys. If so, it looks as if the Federal Reserve's move to a tighter monetary policy, which started in June 2004, is having the desired impact of reining in economic activity. The monetary authority's actions have also caused a perceptible slowdown in the economy, which initially got off to a strong start this year, and it looks as if the Federal Reserve now risks overdoing it in a bid to combat inflationary pressures.

Rising long-term interest rates, and "lofty" asset values, are finally having a dampening effect on commercial real estate investment activity, according to Prudential Real Estate Investors' midyear 2006 outlook report. Even then plenty of investment capital continues to chase real estate, although overall investment activity appears to be slowing, the real estate investment and advisory business of Prudential Financial reports. PREI expects that investment returns have hit a peak and will begin to moderate through the rest of 2006 and into 2007.

The Prudential associate expects total returns on private, unleveraged real estate investments, as measured by the National Council of Real Estate Investment Fiduciaries Property Index, to be in the 12% to 15% range in 2006.

"Real estate fundamentals have continued to improve as the economy has expanded and while transaction activity continues at a fairly brisk pace, the market appears to be slowing from its somewhat frenzied rate of recent years," notes Youguo Liang, managing director/head of PREI Research. "The balance of power seems to be shifting slightly in favor of buyers."

On the debt funding side, PREI expects markets could slow along with transaction activity, depending on how high interest rates climb. Investor demand for commercial mortgage-backed securities and collateralized debt obligations continued to drive lending activity in the first half of 2006, PREI reports, as investors continue to look for ways to bet on the property market recovery.

Higher interest ...