The Federal Open Market Committee concluded its second meeting of the year yesterday. The Fed maintained its promise to increase interest rates, which were raised a quarter of a percentage point, and is prepared to raise them above 2.5 percent over time as needed if inflation continues to remain at elevated rates.

“With appropriate firming in the stance of monetary policy, we expect inflation to return to 2 percent,” said Fed Chair Jerome Powell. “That said, inflation will likely take longer to reach our price stability goal than expected.”

While the Fed moving rates is not directly tied to lender rates, there are indirect correlations that have historically applied to the real estate market.

“The rise in Fed fund rates, along with their goal of selling bonds, will cause an increase in the cost of capital for real estate,” said Matthew Dzbanek, Senior Director, Capital Services. “In cash flow-constrained markets, this could cause a reduction in loan proceeds. Still, though rates are starting to increase, they are near historic lows. The increase in rates have been telegraphed for some time and we’re seeing that many real estate investors and lenders have already adjusted for this consideration in their underwriting and overall investing strategies.”

Meanwhile, despite a relative stabilization of the job market, inflation remains sky high and hit 7.9 percent at the end of February of this year, the highest increase since January 1982. This percentage also represents a rate more than three times higher than the Fed’s target goal. To combat this, Powell indicated they would be aggressive about selling bonds off the balance sheet, which represents trillions of dollars.

“Inflation and real estate are not directly correlated,” said Dzbanek, “but in areas like New York, we have seen the two move in the same direction as a result of wage increases due to inflation. Given these factors, we expect to see real estate values increase in market-rate multifamily, for example, which speaks to why property investment is such a good hedge against inflation.”

While the Fed has been transparent about its plan for some time, the war in Ukraine is causing some market anxiety, particularly as oil and gas prices rise.

“The war may impact supply and labor costs,” said Dzbanek. “However, this will continue to drive interest in the most stable asset classes, such as industrial and multifamily. More than this, as the cost of building materials increases, investors may focus more on existing assets as a way to control cost.”

That stated, other asset classes are still seeing a great deal of interest from the lending market, particularly if they’re well-located and strategically positioned for new consumer demands.

“We’ve recently financed a number of mixed-use buildings with vacant or expiring tenants, such as a fully vacant building in Brooklyn, where we achieved a 75-percent LTV with a five-year fixed rate,” said Dzbanek. “These are advantageous terms for a fully vacant building especially with the vacant retail component. Lenders are still aggressive for the right deals and confident in overall real estate market metrics.”

As the Fed continues to increase rates for the first time since 2018, there is confidence that stability is increasing in the long run and commercial real estate will continue to thrive.