Fed finally raises short-term interest rate

Industry watches closely for future increases

UPDATED, Dec. 12, 6:13 p.m.: For the first time in nearly a decade, the Federal Reserve opted Wednesday to raise short-term interest rates, signaling growing confidence in the U.S. economy and completing an action that those in the real estate industry had long expected.

The Fed raised its benchmark interest rate by 0.25 percentage points, and forecasted that it will raise interest rates by about one percentage point a year over the next three years, reaching 3.3 percent by 2019, according to the New York Times. Mortgage rates tend to rise with the benchmark rate, making the issue an important one for real estate.

During a press conference Fed Chair Janet Yellen said she wouldn’t give a “simple formula” as to how the central bank would raise rates, but repeatedly stressed that they would be “gradual.”

“I do want to stress that when we say gradual, gradual does not mean mechanical, equally timed [or] equally sized,” she said.

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Wednesday’s hike is the first increase since the Fed cut rates to near zero in December 2008 in order to boost the economy after the housing collapse. In 2007, the rate had reached 5.2 percent.

Because the decision has been expected for some time – the Fed on several occasions indicated it would raise rates only to punt the decision to later meetings – the increase has largely been built into commercial real estate prices.

“My first reaction was, ‘yawn,'” said Andrew Nelson, chief economist for Colliers. “I think the market largely anticipated this, so there’s no great surprise. All of the potential impacts would be baked in.”

Spencer Levy, head of research for CBRE, said in a statement that in the near term he didn’t expect much volatility in the commercial real estate market.

“We do not believe today’s move will have any impact on the commercial real estate markets and that the Fed likely has significantly more room to move before we begin to see real pressure on cap rates,” he said. “That said, certain markets may be more susceptible than others to interest rate increases.”