Fitch: Rate Hike Not a 2004 Concern for U.S. Real Estate Markets.

NEW YORK -- This afternoon the Federal Reserve raised the fed funds rate to 1.25%, up 25 basis points. Wall Street ratings agency Fitch Ratings sees no short-term impact due to the rate increase in several key real-estate sectors; Homebuilders, Commercial Mortgage-Backed Securities and Real Estate Investment Trusts. Fitch anticipates that both short and long rates to be up 1.5% percent (including today's increase) in total over the next twelve months.

'While the homebuilding sector is by no means immune to it, an interest rate increase brought on by improving employment and economic figures generally has less of an effect, especially with a sector that has shown such robust character,' said Robert Curran, Senior Director and primary Homebuilding analyst for Fitch Ratings. 'Though today's rate increase is likely to be nothing more than a speed bump, the homebuilding sector may see a 4-5% decline in housing starts if future interest rate increases persist into 2005, though they would be coming off record levels. Nevertheless, credit metrics are likely to be at least maintained through the balance of this year and into 2005.'

Though the same lack of short-term repercussions likely holds true for the commercial mortgage-backed securities sector, there are some isolated issues pervading CMBS that may be made worse by a rise in interest rates. 'While it appears that the office sector has bottomed out, it remains Fitch's primary concern for CMBS. Many leases are still above market and tenants will still pay higher than market rates until their lease expires. This may translate into continued cash flow declines,' said CMBS Managing Director Susan Merrick. 'Overall, however, CMBS has performed exceedingly well and, so long as there are no sharp rises in rates, today's increase shouldn't be too much of a shock to the system.'

The REIT sector's preparedness in anticipation of an interest rate increase also appears to have long-term benefits. 'REITs very opportunistically refinanced their debt and preferred stock in a very favorable rate environment, leaving them with predominantly fixed-rate borrowings and thus reducing their exposure to the rise in interest rates,' said Tara Innes, Managing Director in Fitch's REIT group, 'All else being equal, rate increases of the magnitude anticipated by Fitch could result in a 4-6% decline in operating earnings and FFO. While marginally negative, the effect on debt service coverage levels of roughly 20 basis points would be unlikely to warrant whole-scale downgrades in the sector, though could prove challenging to companies with coverages at low end of their rating category.'