Rising interest rates could dampen the recovery of Florida’s real estate market a bit, a new University of Florida (UF) survey suggests.
A look at the second quarter of 2013 found that the general investment outlook for all market sectors declined for the first time in two years – and it will continue to weaken as rates continue to go up. For the study, UF surveyed 145 real estate analysts, investors, brokers and others.
Interest rates on loans are based on U.S. 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, says Timothy Becker, director of UF’s Bergstrom Center for Real Estate Studies, part of the Warrington College of Business Administration.
“In the end (higher lending rates) make 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 says.
“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 says. “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.”
Expert outlooks by real estate sector:
• New single-family and condo development declined slightly but remained positive.
• Multi-family properties continue to be positive. Rents and occupancy will increase but at a slower rate.
• Office markets improved for Class B space (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,” Becker says. “It is reflective of the changing dynamics of peoples’ tastes, so the younger generation wants to rent longer. 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 homebuilders, but Becker says it will be interesting to see the impact of interest rates over the next few quarters.
“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 downpayment,” he says.
Interest rates have been artificially low for a long time because the Federal Reserve has been pumping money into the marketplace, but that’s expected to end because of the improved overall economy and a 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,” Becker explains. “Any time we see nonsense from Congress, it just shakes people’s 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.”
© 2013 Florida Realtors®
