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Getting jittery: rate hike has investors on edge.

The Federal Reserve increased short-term interest rates by another 25 basis point on March 22, the seventh such "measured" rise since the Fed began lifting rates from rock bottom 1% levels in June of 2004.

In the real estate world, the quarter percentage increase, from 2.5% to 2.75%, affects mildly the cost of short-term floating rate debt. The Fed's statements about the possibility of looming inflation however, combined with a rising Consumer Price Index, had an immediate impact on the cost of long-term borrowing.

"Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident," the Fed said in a statement that spurred a sell off of 10-year Treasury bonds that, in turn, spiked the yield by 10 basis points from 4.51% to 4.61%.

While the 10-year Treasury rate settled down in the days following the Fed's announcement, real estate investors have become somewhat jittery when it comes to deciding the best time to lock into long term rates.

"With Treasurys moving up and down on a day to day basis, investors are worried they will lock on a bad day," said Gary Gabriel, executive director of Cushman & Wakefield in New Jersey.

"If you get a rate that's a number of basis points higher and it's for a big chunk of financing, that could affect an investment's ability to perform."

The market isn't the only thing that might drive rates upward at a faster tempo. Aside from the pressure inflation fears puts on the 10-year Treasury rate, the Fed hinted that its measured pace, interpreted by investors to mean a steady series of 25 basis point rises, might be abandoned for stiffer increases.

"The Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability," the Fed said in its press release for the March 22 meeting.

Some spectators feel this could mean a 50 basis point increase at the Fed's next meeting on May 3 and short term rates as high as 4% by year's end.

According to Stuart Bruck, of Time Equities, the increases will begin to have palpable effect on the capital structure used for real estate acquisitions.

"Borrower are going to have to come up with more equity partners," he said. "When rates go up, lenders are going to start offering more floating rate loans with the option to fix. Those are going to be more popular."
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Author:Geiger, Daniel
Publication:Real Estate Weekly
Geographic Code:1USA
Date:Mar 30, 2005
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