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Self Storage Reacts to Federal Reserve Raising Funds Rate

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Self Storage Reacts to Federal Reserve Raising Funds Rate

The Federal Reserve signaled increasing confidence in the economy with its move last week to raise the Federal Funds rate for only the second time in a decade. Storage owners can expect to get used to such rate increases in 2017 and the resulting impact on consumer loans and those holding floating rate balance sheet bank loans on their storage facilities.

The increase in the Federal Funds rate up 25 basis points had an immediate effect on U.S. lenders. The country’s biggest banks announced they would raise their prime rate, a reference rate for a variety of loans including credit cards, to 3.75 percent from 3.5 percent, which will push consumer loan rates higher.

The Fed Funds rate increase impacts storage borrowers who have floating rate balance sheet bank loans.

“That said, many of these loans are LIBOR-based and it appears that the market had already anticipated this move by the Fed because LIBOR had already increased by 20 basis points prior to the Fed rate hike,” said Jim Davies, principal of Talonvest Capital, Inc.

Noel Cain, managing partner of the debt and equity group of SkyView Advisors, says storage owners looking to finance will pay more today than a month ago, and quite a bit more than three months ago, though rates remain historically low.

“We have seen a dramatic increase in long-term rates since the election, about .75%, so some of this has been priced into the market already,” Cain says.

Rising interest rates could dampen the brisk pace of storage deals in the short-term due to the “bid-ask” gap that occurs between sellers and buyers after a market change, Davies said. During that period sellers usually adjust their expectations. The rate hike could prompt some sellers who procrastinated in making their sell or hold decision to sell now, knowing higher interest rates are coming.

If a Trump presidency actually brings faster economic growth from lower taxes, decreased regulation and increasing inflation, interest rate hikes will become far more common in his first year in office than in all of President Obama’s two terms.

The consensus expectation is that the Fed will raise rates three times in 2017 unless GDP continues a slow, under 2 percent pace of growth.

“Since the Prime rate typically matches Fed Funds rate movements, Prime could be in the 4.25 percent to 4.5 percent range by the end of 2017,” Davies said. 

Cain says he thinks most of the drama is over and that long and short term rates will continue a much slower paced increase through the year.

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