Rising interest rates could dampen the recovery of Florida’s real estate market, a new University of Florida survey suggests.
A look at the second quarter of this year found the general investment outlook for all sectors of the market declined for the first time in two years, according to a survey of 145 real estate analysts, investors, brokers and others. Optimism from previous quarters has waned and will continue to weaken as rates continue to go up, the report states.
Interest rates on loans for all property types are based on the 10-year treasury interest rates, which jumped 66 basis points between the start and end of the second quarter. As of last week, it was up 130 basis points, said Timothy Becker, director of the Bergstrom Center for Real Estate Studies, part of the Warrington College of Business Administration.
“In the end it makes deals harder to do, as you increase the interest rate, you have to get more rental growth and higher occupancy in order to make the numbers work,” he said.
“There are a lot of deals being done right now, that’s why the market has really picked up; things are recovering and people can charge more rent,” he said. “But as those interest rates start to tick up and if they continue at this pace, it’s going to get to the point where it’s difficult to make deals work at the current rental rates.”
The report covers apartments and commercial rental property, single-family houses and condo development, and developable land. Here are the outlooks by sector in the second quarter:
· New single-family and condo development declined slightly but remained positive.
· Multi-family properties continue to be positive, and rents and occupancy will increase but at a slower rate.
· Office markets improved for Class B, or older properties, but declined for Class A, newer properties.
· Retail properties continue to be positive with growth in rents and occupancy driving optimism, but increasing interest rates and declining consumer incomes will have impact.
· Land investment increased across all property types with most reaching survey highs.
“The apartment market has been probably the best sector for the past couple years. It is reflective of the changing dynamics of peoples’ tastes and so the younger generation wants to rent longer,” he said. “But it’s also reflective of what happened in the housing market — people got foreclosed on their houses, they had to go somewhere so they moved into apartments.”
The housing market is starting to come back particularly for home builders, but it’s going to be interesting to see the impact of interest rates over the next few quarters, Becker said.
“If you need that low interest rate in order to buy the house and make the payment, then it’s going to push people into a lower price home or they may decide not to do it and wait until they can put up a bigger down payment,” he said.
Interest rates have been artificially low for a long time because the Federal Reserve has been pumping money into the marketplace, but that is expected to end because of the improved overall economy and the fear of inflation.
A political stalemate at the federal level over raising the debt ceiling and funding the government also could affect investments.
“Markets hate uncertainty, they just don’t like it when they can’t plan for the future,” he said. “Any time we see nonsense from Congress, it just shakes peoples’ confidence. They rein back investment and kind of wait it through.”
On the positive side, Florida’s population is still growing and tourism keeps increasing.
“Developers certainly like the fact that we’re growing, I think that overall if you look at the graphs it’s a positive report,” Becker said. “We’re still in a good position, things are still getting better. There is just a bit of uncertainty that the market needs to navigate as it moves forward.”