Redstone’s Salzer details downside to long-term low-rate environment

Amid lingering uncertainty, the manager analyzes historic rates in an attempt to predict what is to come.

Redstone Funding, a Tampa-based investment manager, believes the low-interest rate environment seen over the past 14 years has had its downsides.

“The last 14 years have been the longest period of historically low interest rates [and] those rates have allowed us to spend like never before on everything, but especially in my world of real estate,” Brad Salzer, president, told Real Estate Capital USA. “We have been lulled into believing there is an endless supply of cheap money.”

Salzer has been digging into the Federal Reserve’s last three rate increases, specifically looking at the 75-basis point increase seen on June 15 in an effort to decipher how ramifications of this could impact the commercial real estate debt market, but also the broader US economy. June’s rate hike was the largest in 28 years.

In a paper issued this week, Salzer looks at how the Prime rate, which Redstone often uses as the benchmark rate for its lending, has fluctuated in the past with the idea that this might help predict about what is to come.

Data shows the average prime rate between 1995 and 2021 was 6.81 percent and the average duration of time from rate change was 2.33 months. The median was 6.0 percent with the highest rate being 21.50 percent and the lowest rate being 3.25 percent.

“This anomaly, created by the Federal Reserve’s desire to keep the economy on an even keel, has lulled us into a false sense of security as we enter a recession,” Salzer said. “With the headwinds we face today – inflation, war, supply chain, a global pandemic, and a federal deficit of [more than] $30 trillion – can government intervention successfully steer us from falling off the cliff? And with our standard of living elevated with cheap money for the longest continuous period ever, how will we adapt as money supply tightens? Seeing commercial mortgage delinquency at an all-time low, from Redstone Funding’s perspective, we expect cash flows to be significantly impeded with an inevitable run up in mortgage delinquency.”

For the period starting with the global financial crisis until the Federal Reserve’s first-rate change on March 17, the average interest rate was 3.75 percent with an average duration to rate change of 8.20 months. The median was 4.50 percent.

The Mortgage Bankers Association reported outstanding commercial and multifamily debt climbed to a new high at the end of Q1, which Salzer describes as logical understanding that prices have moved in tandem with a higher need for funding. Low historical interest rates for the longest continuous period in history have generated an economic expansion unlike any other, the paper continues.

“In my world of commercial real estate, cap rates are the lowest we have ever known, resulting in the highest prices we have ever seen,” Salzer adds. “Not only is inflation [a pain] but we need a correction.”

In the meantime, Salzer is asking if people should be prepared to make some sacrifices in their daily lives? Or will they start to take on debt to maintain the lifestyle they have become accustomed to for so long?

“The real bottom line: the Federal Reserve should not have waited until this crisis to have raised rates,” stressed Salzer. “Raise them in a strong economy, not a weakening one.  Lowering interest rates has always been the tool utilized to stimulate the economy.”