Page 18 —
COLORADO REAL ESTATE JOURNAL
— December 2-December 15, 2015
Finance
T
he last time the Federal
Reserve raised interest
rates, June 2006, Jake
Plummer was the starting quar-
terback for the Denver Broncos.
Since then (and as of the writ-
ing of this article) the Broncos
have
seen
seven start-
ing quarter-
backs. From
June 2006 to
D e c e m b e r
2008, the Fed-
eral Reserve
d e c r e a s e d
the effective
federal funds
rate and has
remained in a
“zero interest
rate” environ-
ment since 2008.
To understand how we got
into this zero interest rate envi-
ronment, it is first important to
understand the goal of the Feder-
al Reserve. In its very basic form,
the Federal Reserve was com-
missioned to keep our banking
system balanced and maintain a
healthy economy. When the Fed-
eral Reserve lowers interest rates,
it is in an effort to boost the econ-
omy by making borrowing more
available. Conversely, the intent
in raising interest rates is to slow
down the economy by making
borrowing less available.
When our economy fell into
the last economic downturn
from 2008 to 2012, the Federal
Reserve stepped in and lowered
interest rates in an effort to free
up capital to increase consumer
and commercial spending. The
Federal Reserve’s decision to
lower rates was in response to
identifying the U.S. economy
was off-course. The economy
was so far off-course that, in
addition to lowering inter-
est rates, the Federal Reserve
also implemented a course of
action to print as much money
as necessary and bought large
quantities of Treasury bonds.
These additional measures were
known as quantitative easing.
Digging out of the worst eco-
nomic downturn since World
War II took three rounds of QE
in addition to a “zero interest
rate” environment.
The third and final round of
QE ended in the third quarter of
2014. However, we still remain
in a zero interest rate environ-
ment, but that is all about to
change as the Federal Reserve
has announced that it will raise
the EFFR.
The big guessing game is
when and how will an increase
in the EFFR affect commercial
real estate. Analyzing historical
data can provide us with a fairly
educated look into what is in
store.
n
Recent economic perfor-
mance compared to the last
expansion cycle.
The Federal
Reserve has provided strong
indication that it will increase
the EFFR as soon as December.
However, what factors influence
the decision? Answers lie in the
comparison of recent economic
performance against the last
expansion cycle, which occurred
from 2003 to 2007, totaling 46
months.
Total employment has trended
in an upward fashion similar to
2003 to 2007. Positive job growth
has occurred for 60 consecutive
months, compared to 46 consec-
utive months from 2003 to 2007.
The average monthly addition
of jobs over the past 60 months
has totaled 201,000 jobs per
month, compared to 171,000 jobs
per month from 2003 to 2007.
Based on the data, the cur-
rent expansion cycle has outper-
formed the last expansion cycle,
and the Federal Reserve has not
once increased the EFFR. How-
ever, in the last expansion cycle
the Federal Reserve increased
the EFFR 17 times, each time by
25 basis points.
n
How an increase in the
effective federal fund rate
might impact commercial real
estate value.
Using historical
10-year U.S. Treasury rates and
historical capitalization rates
(the rate of return based on an
income stream a property pro-
duces) as benchmarks, conclu-
sions can be made as to how
an increase in the EFFR might
impact commercial real estate.
By subtracting the 10-year U.S.
Treasury from the cap rate, a
premium of risk can be obtained
and a comparison of investor
demand can be made. Adecreas-
ing risk premium spread signals
less risk, whereas an increas-
ing risk premium spread signals
heightened risk.
During the last economic
expansion cycle, the EFFR was
raised 17 times. This increase
did not produce a one-to-one
increase to the U.S. Treasury
rate, however, the relationship of
the two appears to be correlated.
Over the course of the last cycle,
the U.S. Treasury increased
approximately 110 basis points.
Inverse to the 10-year U.S. Trea-
sury, capitalization rates during
the 2003 to 2007 expansion cycle
declined approximately 150
basis points. The risk premium
during 2003 to 2007 decreased
approximately 250 basis points,
signaling a decrease in risk by
commercial real estate investors.
Using the same benchmark
metrics, data from the last 60
months provides an outlook into
how an increase in the EFFR
might impact commercial real
estate today. During the cur-
rent economic expansion cycle,
the 10-year U.S. Treasury has
increased approximately 30
basis points and cap rates have
decreased approximately 50
basis points. As of third-quar-
ter 2015, the risk premium was
approximately 410 basis points,
a reduction of approximately 75
basis points from fourth-quarter
2011. Last cycle’s risk premium
was 180 basis points lower than
the last economic expansion
cycle, but please note again that
during the past 60 months the
Federal Reserve has not raised
the EFFR once, compared to 17
times in the previous expansion
cycle.
If history follows suit, the
10-year U.S. Treasury will
increase upon an increase in the
EFFR, however, it won’t be a
one-to-one increase against the
EFFR. History also tells us that
the risk premium will decrease,
signaling a healthy commer-
cial real estate environment.
How much of a decrease in the
risk premium will be seen is
unknown, just like who the
Broncos starting quarterback
will be next year.
s
Leon McBroom
Associate director,
HFF, Denver
3.8million sf of industrial proper-
ties worth more than $190 mil-
lion.
“Corum’s experience with
industrial developments made
lenders very comfortable,”
Simon said.
“Really, this was a case of the
right developer, at the right time,
bringing the right product to the
right location,” Simon said.
Other News
n
Denver-based
Monteg-
ra Capital Resources
funded
a $375,000 mortgage loan on a
14,100-square-foot retail build-
ing. in Longmont.
Anytime Fitness
leased 8,550 sf
in the building at 1111 Francis St.
The remaining 5,500-sf is vacant.
The borrower,
J.K.B. Store
Properties LLC,
owns the
building free the clear.
J.K.B. used the proceeds from
the loan to reimburse itself and
to improve the vacant space.
Montegra closed the loan in
less than two weeks.
The 50 percent loan-to-val-
ue loan carries a 10 percent
interest rate and a 2.5-point
charge.
s
For Company Profiles, Contact
Information & Links, Please Visit
Commercial Real Estate
Lenders
Directory
COMMERCIAL REAL ESTATE LENDERS DIRECTORY
If you would like to include your firm in this directory,
please contact Jon Stern at 303-623-1148 or
@
Academy Bank
Arbor Commercial Mortgage, LLC
Bank of America Merrill Lynch –
Commercial Real Estate
Bank of Colorado
Bank of the West
Berkadia Commercial
Mortgage, LLC
Bloomfield Capital Partners, LLC
Capital Source
CBRE|Capital Markets
Chase Commercial Term Lending
Colorado Business Bank
Colorado Lending Source
Commerce Bank
Commercial Federal Bank
Essex Financial Group
Fairview Commercial Lending
FirstBank Holding Company
Front Range Bank
Grandbridge Real Estate Capital LLC
Hunt Mortgage Group
JCR Capital
Johnson Capital
JVSC-CBRE Capital Markets
KeyBank N.A., Key Commercial
Mortgage Inc.
Merchants Mortgage and Trust Corp.
Midland States Bank
Montegra Capital Resources,
Private Lender
Mutual of Omaha Bank
NorthMarq Capital, Inc.
RNB Lending Group
TCF Bank
Terrix Financial Corporation
Trans Lending Corporation
U.S. Bank – Commercial Real Estate
U.S. Bank SBA Division
Vectra Bank Colorado, N.A.
Wells Fargo SBA Lending
Wells Fargo N.A. – Commercial
Real Estate Group
