2017 has been a record-breaking year in a several key areas which stand to significantly impact loan renewals. Unemployment is lower than it has been for several decades, inflation is in check and the stock market is soaring while also experiencing less volatility than any time in the last thirty years. The economy is strong, and the future looks bright: bright enough to withstand (and even flourish) in the face of upcoming interest rate increases.
For starters, the declining unemployment rate is making it challenging for employers to fill positions. Competing in this type of market means offering higher wages to attract and retain workers. With more spending money in their pockets, these higher wage-earners pay more income tax and have more discretionary spending money, both of which further fuel the economy.
Add to this the rate of inflation over 2017, which has caught even the Federal Reserve Board by surprise. It has failed to increase at the rate which the Fed predicted for 2017. It is unlikely that the interest rate increases proposed for 2018 will impact those rates. Cambridge Realty Capital Companies Chairman Jeffrey Davis believes that the Internet economy may be at least partially responsible for keeping inflation in check. “The Internet economy allows and provides for intense competition with total transparency in the consumer section.” With consumer goods making up 70 percent of the GDP, this helps keep inflation from rising sharply.
Of course, the stock market has rebounded significantly since 2008, another factor contributing to the thriving US economy. This comeback leads to perceived wealth, which, in turn, creates more perceived wealth and purchasing power.
These records and growths can be attributed, at least in part, to the quantitative easing strategy employed by the Federal Reserve after the 2007/08 recession. The move, while unconventional, helped to pull the US economy out of its downspin. Although it took a decade to reach its current state of health, the Federal Reserve is satisfied with the results of the program. Last September, it called for an end to quantitative easing, and was already in the process of raising interest rates.
The Fed has already indicated its plan to raise rates in three increments over the next year. However, Davis believes that rates will continue to go up in the long-term future. If this prediction is realized, senior facility operators who currently have variable rate loans stand to be hit the hardest. “If interest rates continue to rise, monthly loan payments may increase significantly. Those who aren’t prepared for such increases may find themselves in trouble.” Even a hike of a quarter of a percent can add thousands to your monthly payments and hundreds of thousands to the total amount you pay over the term of your loan.
“The US is just coming out of a long period of historically-low interest rates,” Davis notes. “We are in the 7th or 8th inning of quantitative easing. Eventually, this will end. There is no place else to go but up, and this trend is something that is borne out in history.”
Davis has this advice for senior facility operators: “Owner/operators in both senior housing and other forms of real estate need to be aware of changes and begin working on putting long-term debt on properties,” and adding, “sometimes the best offense is a good defense, and now is the time to play defense.”