Now that short-term interest rates appear to be poised to move higher in carefully orchestrated increments, Cambridge Realty Capital Companies Chairman Jeffrey A. Davis has this advice for senior housing/healthcare borrowers: “Don’t fight the Fed.”
At the December meeting of the Fed’s Open Market Committee, members unanimously voted to advance the Fed Funds Rate .25 percent, with the promise that prudent advances in future months will attempt to slowly restore normalcy to the capital markets. The Fed Funds Rate is the target interest rate banks charge each other to borrow Fed funds overnight.
“Even though the long anticipated increase in the Fed Fund rate was modest, the Fed’s decision to make this move was huge,” Mr. Davis said.
Cambridge is one of the nation’s leading senior housing/healthcare lenders, with more than $4.5 billion in closed senior care mortgage loans. Mr. Davis says the Fed’s latest move means the central bankers, in an increasingly rare moment of unanimity, believe the economy has improved significantly, is ready to stand on its feet, and no longer needs monetary policy incentives to prosper and grow.
“Of course, quarterly messages from the Fed’s Open Market Committee can and do change. However, for now, the Fed appears to be satisfied that an important corner has been turned.” he said.
Armed with this information, Mr. Davis says senior housing/healthcare borrowers effectively have two options. They can either play it safe or take a more risky approach.
“One way to interpret the Fed’s message is that interest rates are indeed on an upward trajectory. No one knows where this momentum may or may not go, but the safe bet is to take risk out of the equation by turning variable rate loans into fixed rate mortgages and limiting borrowing as much as possible.
“The risky play has borrowers continuing to expand and acquire new properties in a climate that projects relatively low interest rates as the new normal,” he said.