Rates Have Started Rising. Time to Buy?

Interest rates have jumped in the last couple of weeks.

After sitting at 0.52% in late August, the Ten-Year Treasury is now at 1.1%. Over the last two weeks, it has risen about 20 basis points.

While that might seem like a dramatic jump, John Chang, SVP and director of research services at Marcus & Millichap, said in a recent video that rates are still historically low.

“I have to remind everyone that a year ago before the onset of COVID, the 10-Year Treasury was in the 1.8% range,” Chang says. “So rates are still quite low by comparison, but what’s changed a couple of important triggers have caused financial markets to strengthen their economic outlook for the year.”

Among those triggers are Democrats winning the Georgia Senate runoffs (giving the party control of Congress) and President Biden’s election win being validated by Congress.

“These events reduce political uncertainty and increase the probability of additional economic stimulus,” Chang says. “Economists are now forecasting 2021 GDP growth in the low 4% range to as high as 5% for the year that compares with last year’s estimated economic decline of negative 3.5% percent.”

Chang says those upgraded forecasts are putting pressure on interest rates. If job creation moves into positive territory and the vaccine rollout goes well under Biden, rates should continue to rise.

“The factors that had pushed the rates down are pretty much behind us now, and there will be upward pressure on interest rates going forward,” Chang says.

As rates have jumped, the pricing of 10-year fixed financing for an 80% loan-to-value apartment acquisition is in the low to mid 3% range, which is about 30- or 40-basis points higher than a couple of weeks ago, according to Chang. For 60% loan-to-value, rates are at around 2.7%

“Other property types generally can’t get 80% loan-to-value financing,” Chang says. “Most of the loans for other properties come in at around 60% loan-to-value. And so for industrial assets with credit tenants, rates are running in the upper-2% to mid-3% range.”

For high-quality office deals, rates are around 3.25% to 3.50%, while a neighborhood retail center with an essential anchor sees rates in the mid- to high-3% range. Self-storage has rates in the mid-3% range. For hotels, it is difficult to get financing.

“Borrowers may be able to finance through the SBA [Small Business Administration] or through a local bank if the borrower has a strong relationship, but rates are on the move,” Chang says.

With rates on the move, Chang thinks buyers should adjust their strategy. He expects more investors to enter the market in the second half of 2021 and 2022.

“That means investors who plan to buy properties this year may be best served to get the wheels in motion,” Chang says. “Yes, it’s possible rates could go down again, but that would likely only happen if there is a major setback on the economic stimulus or the vaccines or some other significant turmoil erupts, but the investment climate will become increasingly competitive.”