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The even larger 75 basis point hike announced this afternoon, following previous rate hikes of 125 basis points in previous meetings, makes the cumulative impact on interest rate hikes significant to date. Moreover, one must add the impact of rising inflation on the economy, in particular on the price of fuel, and the total potential impact becomes even more significant.
Increasing the magnitude of the interest rate hike to 75 basis points could likely undermine real estate investor confidence in the near term.
In the April Q2 FNB Property Broker Survey, we had already seen signs of slowing demand and sales activity for office and retail real estate. We expect this new rise in interest rates to maintain the weakening pressure on demand for properties in these 2 sectors. In addition, it becomes possible that the short-term slowdown in demand will extend to the outperforming industrial property class as well, and we expect this property class to experience some slowdown in sales activity.
The FNB Commercial Property Broker Survey also indicated declining vacancy rates across the top 3 commercial real estate sectors earlier in the year. We anticipate that this decline may stop following this recent rate hike, with a slowdown in corporate expansion.
This continued rise in interest rates should lead to the continuation of the multi-year “upward drift” in real estate capitalization rates, via their upward pressure on long-term bond yields. This in turn leads us to expect 2022 to be another year of a real (inflation-adjusted) decline in the average capital value of commercial real estate as a whole, but perhaps not a full decline. of face value.
On the residential rental market side, we remain convinced that the rise in interest rates is slightly favorable to a firming up of the rental market, with demand from tenants being supported by some of the aspiring buyers who are delaying their purchase until the rates have stopped rising.
However, rising rates are expected to cause the pace of new residential development to slow in the short term.
Within the commercial real estate sector, the financial pressure induced by rising inflation and interest rates should force a new prioritization of consumer spending partly away from non-essential and reportable spending.
We believe this works in favor of smaller convenience centers that focus more on essentials such as food and groceries, and away from those that focus more on non-essentials such as entertainment and luxury products. We believe that, overall, this environment is more negative for larger regional shopping center categories, which often focus more on these non-essential, carry-forward items than smaller categories.
Finally, growth in commercial mortgages, which has recently hovered between 2% and 3% year-on-year, is also expected to slow in the near term.