Fed impact less than some had feared

COMMERCIAL REAL ESTATE

June 29, 1994|By Timothy J. Mullaney | Timothy J. Mullaney,Sun Staff Writer

To hear interest-rate doves tell the story, you would think the Federal Reserve's moves to raise interest rates would have killed the real estate recovery by now. But in Baltimore, at least, the Fed's impact has been more subtle than first feared by Fed critics.

Real estate pros say they see rising interest rates hurting them only at the margins -- or else they are still waiting for signs later this year that will tell them whether the new, higher rates will hurt them a lot or only a little.

Many developers say the Fed seems to fear a strong recovery -- and seems determined to choke off any resurgence because it thinks growth will beget inflation. That criticism recurred last week when Casey & Associates reported that office leasing in the region all but ground to a halt during the second quarter.

"We certainly had a lack of leasing in the second quarter," Casey & Associates President J. Joseph Casey said. But even he says trends for the second half of the year look positive.

One reason is that the commercial real estate business may be less interest rate-sensitive than before. The steady trend toward more public market financing of real estate companies, especially the wave of initial public offerings by real estate investment trusts, gives commercial developers longer-term sources of financing that don't make them waver with each bond-market-to-Beltway tremor.

Officials of companies such as Host Marriott Corp. of Bethesda say public financing has been one reason they worry less about interest rates. Host Marriott raised cash with a $240 million stock offering in January, as did the Rouse Co. of Columbia with bond and preferred stock issues in 1993.

Rouse Investor Relations Director David L. Tripp said many of Rouse's clients also don't rely on bank loans to finance stores at Rouse's malls. Tenants like The Gap or The Limited are also likely to have long-term credit arrangements, set up when rates were lower, that they can draw on to stick with their expansion plans.

More importantly, the late

1980s left such a glut of space in many markets that even last year's rock-bottom rates couldn't spur much development. Higher interest rates mean little to developers who don't plan to build anyway.

"Lower interest rates might have made building an office building more likely, but we wouldn't do it without a tenant in our pocket," Mr. Tripp said.

That's not to say that higher interest rates haven't had their effect, especially in the housing market. Some homebuilders report some signs of a small dip because of mortgage rates, but Timothy Doyle, president of the Mid-Atlantic region for Ryland Homes, said the key test will come by September and October.

He says the summer crowd at Ryland's communities is usually smaller than spring's, but serious and ready to buy. The test will be whether those customers come through.

On the commercial side, the biggest losers may be developers who couldn't refinance last year and thus lost out on the chance to lower their borrowing costs.

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