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AS INTEREST RATES CLIMB, WHAT TO DO — BUY OR HOLD?

Record-low interest rates have been driving a retail real estate development boom for about two years. Since mid-March, however, there have been signs that this could soon change. The yield on the 10-year Treasury note was at 3.79 percent on March 19. At press time it had risen to 4.74 percent. Further, economists were saying that they expected the Federal Reserve Board to raise interest rates by 50 basis points this month. Surprise — the Fed did raise rates, and by exactly that much, but it did so earlier than expected. In June the Fed raised the federal funds rate from 1 percent, its lowest level since 1958, to 1.5 percent.

Some say owners are putting retail real estate properties up for sale out of fear of a dampened market. Real Capital Analytics, a New York City-based real estate research firm, reports that a record $3.2 billion worth of properties were put on the block in April. SCT asked industry executives whether they see themselves selling or holding.

Steven F. Aiello, partner, COR Development Co., Fayetteville, N.Y.

We’re not interested in selling. Ours are all new projects, and we want to own and manage. Most people selling are those who’ve had significant depreciation in property values. Also, interest rate hikes shouldn’t have a big impact on future development projects. We do fixed-rate financing, and we take a conservative approach to financing.

Glenn J. Rufrano, CEO, New Plan Excel Realty Trust, New York City

I believe in cycles. Due to increased cost of funds, over time, prices will have to come down and returns go up. In terms of reinvestment, we have to make sure that the reinvestment capital in our properties, relative to rents, is sufficient to provide spreads to the cost of money. Interest rate increases will not change our strategy. Interest rate increases really mean that the cost of funds has gone up. The cost of funds for us is an important but simple concept. Our goal is to maximize the difference between the cost of funds and the return on our investment. We have to make sure our spreads, the basis of our shareholder equity, are maintained. Can [spreads] be increased in light of increasing interest rates? Potentially, yes. There is some inflationary impact on the economy right now, a general growth which causes the market and Fed to increase rates. If we can capture the growth, meaning higher productivity, that translates to higher rents in general.

Michael A. Pollack, president and founder, Michael A. Pollack Real Estate Investments, Mesa, Ariz.

Cap rates have gotten so low, we needed this correction. We needed something to happen. I think we’re going to see for a while a more stabilized market. We never bought into the really low interest rates, thinking our cash-on-cash returns would be higher. There were a lot of people who did stupid deals because interest rates were so low. But they forgot about underwriting the properties. Some of them were brilliant for selling at the high part of the market, but the market has already started to taper. We’re starting to see deals fall out of escrow that were struck at the low point of the interest rate cycle.

Norris R. Eber, SCSM, CLS, executive vice president of asset management and acquisitions, Joseph Freed & Associates, Palatine, Ill.

Being a long-term holder of real estate, we’re not rushing products to the market. We’ve been through many cycles, and we like to hold what we’ve got. If you have a stabilized product, you should be looking to place permanent debt long-term these days. If the Fed moves the overnight rate — even if they move it 25 basis points — it is psychologically difficult. But is that dramatic in comparison to what the industry went through in the early ’90s? Not really.

Sterling McGregor, vice president of acquisitions and financing, Passco Real Estate Enterprises, Irvine, Calif.

All the fence-sitters have decided, “I’d better sell, because rates will clip my price,” so I would expect to see a lot more product in the market. … The majority of the market is driven by [1031] exchange buyers. They’ve got to defer [capital] gains taxes. In the next couple of months, we’re going to have sellers get out of the properties they’ve bought at historically high prices. Those same sellers are out in the market looking for replacement properties. There are still a lot of those folks looking. In the near term, I would expect the market to get tighter and yields to get tighter.