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Interest-Rate Uncertainty: Self-Storage Borrowers Need to Act Now!

By Shawn Hill Comments

The economic recovery is in full swing, and the gradual unwinding of quantitative easing is inevitable. What does this mean for self-storage investors? The time to seek money is now.

In an ironic twist of fate, on the heels of arguably the greatest real estate recession since the Great Depression, the last 18 months of recovery have presented real estate investors with an unparalleled period of liquidity and low-cost borrowing. During this global financial crisis, the Federal Reserve took unprecedented actions, implementing monetary policies that restrained the federal funds rate to near zero, while simultaneously infusing massive volumes of capital into the market.

These actions kept mortgage-borrowing rates at artificially low levels, effectively bolstering the mortgage market. The removal of near-term interest rate risk aided in the refinance and restructuring of maturing and problem loans for borrowers and lenders, thereby enabling capitalization (cap) rates and real estate values to sustain a much-needed and expeditious recovery.

Today the economic recovery appears to be in full swing, and this strengthening of the economy has tremendous implications for upward pres­sure on interest rates. Last summer, Federal Reserve Chairman Ben Bernanke hinted that the Federal Reserve would soon begin the process of unwinding the quantitative easing by gradually decreasing bond purchases and letting securities mature. These insightful comments rightfully raised caution among the investment community, sparking an immediate spike in Treasury rates.

Specifically, within a short 60-day period last summer, the 10-Year Treasury increased more than 100 basis points, or more than 1 percent. As a result, the borrowing rates on 10-year mortgages went from the low 4 percent to the low 5 percent range in the blink of an eye.

The Fed has since softened its stance on easing, and Treasury rates have responded by settling a bit, currently hovering around 2.65 percent, which is well below its long-term average and not too far off from historical lows. Nonetheless, this gradual unwinding is inevitable, and there’s widespread speculation that it could begin within the year.

What Happens Next?

Indicative of a stronger economy, the withdrawal of Fed monetary support will likely exert tremendous upward pressure on interest rates. In fact, the biggest looming unknown appears to be not “if” but “when” this upward rate movement will begin in earnest. To some, the upward movement witnessed this summer was the beginning of the end of the unprecedented low interest-rate borrowing window. Regardless, the tapering of the Fed’s quantitative easing is expected and should mark a return to a more normal credit environment, which is far less reliant on artificial policy intervention.

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