Macke: We are not because we anticipated this. Because it was telegraphed, and because we believed that there would be a divergence between the direction of long-term and short-term rates, we already made a shift a while ago. Rather than focusing on the timing of Fed increasing interest rates another 25 basis points this year, we are far more focused on employment growth, wage growth and fiscal policy. That is far more impactful than whether or not the Fed increases rates 25 basis points this year or next year. In our research newsletter titled “Rising Rates and Commercial Real Estate: A Glass Half Full or Half Empty?”, it shows that during periods of rising interest rates, commercial real estate outperforms. The reason for that is because people rising rates are typically associated with economic growth which leads to increased demand for real estate space; which leads to increasing rents; which leads to increasing valuations. Assuming that rising rates are accompanied by rising economic growth, we are not concerned about it because commercial real estate benefits from economic growth, unlike fixed income instruments, like bonds. If the economy goes gangbusters, it really doesn't do anything positive for fixed income. In real estate, when the economy does better, we see more demand. That leads to rent growth, and that, at least to some degree, has an offsetting effect on interest rates. That is pretty important, and something that is getting overlooked in this discussion. If rates are rising because of increasing economic activity, then it isn't necessarily a bad thing.

GlobeSt.com: Is the Fed raising rates because of increased economic activity or economic growth?

Macke: The 10-Year Treasury is not moving, and if anything it has gone down. The treasury market reflects investors' expectations regarding economic growth and inflation, along with some other things. They are indicating that they don't see an increase in economic growth. They see it “steady as she goes.” Typically, you think of the Federal Reserve as raising rates when you have an overheating economy. That is not why they are doing it today. They are doing it for a couple of reasons. One: they want to replenish their recession fighting ability, namely they want to be able to lower rates. Two: They have questions regarding asset valuations. They don't want to see valuations across all asset classes become too aggressive. They are not raising rates because they think the economy is going to see a significant increase in growth. Rather, they believe that it will continue to grow and they believe that tightening labor markets will eventually lead to accelerating wage inflation, but it is not because they think the economy is all of the sudden going to go gangbusters. It is a little different than why the Fed usually raises rates, and the reason why short-term rates are not as problematic is because it is gradual. As long as there is a balance between economic growth and the Fed's pace of rising rates, then it is manageable. That is why the Fed saying, 'gradual, gradual, gradual,' is so important.

GlobeSt.com: Is the Fed expecting a recession in the near future?

Macke: You hear the phrase “normalization,” so all they are trying to do is get short term rates back to a normal level. That is really because the economy is creating jobs and we have low unemployment. For that reason, the economy should be able to handle gradually increasing short term rates, to a point. You shouldn't need the same extraordinary measures that you needed a few years ago. It is very normal what they are doing.

Rates are on the rise once again. Last week, the Fed pushed interest rates up another 25 basis points, in a move that was generally anticipated by the real estate industry. While the increase in rates is expected to happen gradually this year, the real estate industry is concerned about how rising rates will affect the market. Christopher Macke, managing director of research and strategy at American Realty Advisors, tells GlobeSt.com that he isn't concerned that there will be a significant market impact because the Fed is returning to normalization. We sat down with Macke for an exclusive interview to hear his thoughts on the recent rate hike, how his firm is responding and get some insight into the potential impact on the real estate market.

GlobeSt.com: Did you expect the Fed to raise interest rates?

Christopher Macke: We anticipated the rise in short-term interest rates, and because they have done a good job telegraphing it, we know that this is going to be a very gradual process. We all talk about interest rates as if they are a monolith, but they aren't. You really have to break it down into at least short-term and long-term interest rates. While the Fed has been increasing short-term rates, and we have seen LIBOR increase with the Fed's activities, the 10-Year Treasury rate when the Fed increased rates last week was actually below what it was when the Fed first announced that it was raising rates on December 15, 2015. The 10-Year Treasury was 2.28% when the Fed said that it was going to start raising rates. The 10-Year Treasury last week was 2.11%. The market is having little reaction to the increase because we are not seeing a significant increase in the 10-Year Treasury rate and again, because the Fed has been telegraphing its likely actions well in advance

GlobeSt.com: What is the response like from the investment market to these gradual increases, and do you have any plans to shift your strategy as a result?

Macke: We are not because we anticipated this. Because it was telegraphed, and because we believed that there would be a divergence between the direction of long-term and short-term rates, we already made a shift a while ago. Rather than focusing on the timing of Fed increasing interest rates another 25 basis points this year, we are far more focused on employment growth, wage growth and fiscal policy. That is far more impactful than whether or not the Fed increases rates 25 basis points this year or next year. In our research newsletter titled “Rising Rates and Commercial Real Estate: A Glass Half Full or Half Empty?”, it shows that during periods of rising interest rates, commercial real estate outperforms. The reason for that is because people rising rates are typically associated with economic growth which leads to increased demand for real estate space; which leads to increasing rents; which leads to increasing valuations. Assuming that rising rates are accompanied by rising economic growth, we are not concerned about it because commercial real estate benefits from economic growth, unlike fixed income instruments, like bonds. If the economy goes gangbusters, it really doesn't do anything positive for fixed income. In real estate, when the economy does better, we see more demand. That leads to rent growth, and that, at least to some degree, has an offsetting effect on interest rates. That is pretty important, and something that is getting overlooked in this discussion. If rates are rising because of increasing economic activity, then it isn't necessarily a bad thing.

GlobeSt.com: Is the Fed raising rates because of increased economic activity or economic growth?

Macke: The 10-Year Treasury is not moving, and if anything it has gone down. The treasury market reflects investors' expectations regarding economic growth and inflation, along with some other things. They are indicating that they don't see an increase in economic growth. They see it “steady as she goes.” Typically, you think of the Federal Reserve as raising rates when you have an overheating economy. That is not why they are doing it today. They are doing it for a couple of reasons. One: they want to replenish their recession fighting ability, namely they want to be able to lower rates. Two: They have questions regarding asset valuations. They don't want to see valuations across all asset classes become too aggressive. They are not raising rates because they think the economy is going to see a significant increase in growth. Rather, they believe that it will continue to grow and they believe that tightening labor markets will eventually lead to accelerating wage inflation, but it is not because they think the economy is all of the sudden going to go gangbusters. It is a little different than why the Fed usually raises rates, and the reason why short-term rates are not as problematic is because it is gradual. As long as there is a balance between economic growth and the Fed's pace of rising rates, then it is manageable. That is why the Fed saying, 'gradual, gradual, gradual,' is so important.

GlobeSt.com: Is the Fed expecting a recession in the near future?

Macke: You hear the phrase “normalization,” so all they are trying to do is get short term rates back to a normal level. That is really because the economy is creating jobs and we have low unemployment. For that reason, the economy should be able to handle gradually increasing short term rates, to a point. You shouldn't need the same extraordinary measures that you needed a few years ago. It is very normal what they are doing.