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Rising fed funds rate....


Freddy C

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Even though interest rates are still near historical lows, the Fed has announced that they expect to incrementally increase the fed fund rate throughout the year. Of course, the reasoning behind this monetary policy is to subdue inflation. The rising cost of oil and the shirking dollar is placing great inflationary pressure on our economy. Thus, one can expect a steady climb in interest rates the coming years.

In light of this, my question is what effect will rising interest rates have on the number and scope of future downtown projects? It seems that projects may be ramping up now because the cost of borrowing in the future will be much more expensive. The local developers may missed the peak window of opportunity for downtown development, which was the last two years, when financing should have inspired more risk taking...but apparently not.

There are many optimist and

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I definitely feel the fear about that. One thing that's helpful to keep in mind, however, is that with high interest rates usually comes a healthy economy. Development in the late 90s was fast-paced, because while rates were high, so were profits and stock prices etc. Naturally such is not seeming to be the future case for the US. That is another "ball of wax." As for investment in times with high borrowing costs, the amount developers are able to earn after the tax crediting on most city sites will offset somewhat the cost of interest. More important to look at are the historic indicators of what happens with high rates - how much are tax abatements able to offset the rates, how much can the market absorb the rates, how much will the rates actually rise?

Of course it's all still guesswork.

Even though interest rates are still near historical lows, the Fed has announced that they expect to incrementally increase the fed fund rate throughout the year. Of course, the reasoning behind this monetary policy is to subdue inflation. The rising cost of oil and the shirking dollar is placing great inflationary pressure on our economy. Thus, one can expect a steady climb in interest rates the coming years.

In light of this, my question is what effect will rising interest rates have on the number and scope of future downtown projects? It seems that projects may be ramping up now because the cost of borrowing in the future will be much more expensive. The local developers may missed the peak window of opportunity for downtown development, which was the last two years, when financing should have inspired more risk taking...but apparently not.

There are many optimist and ?hopetamist? on this forum, while I tend to be more of a pragmatist or realist, if not pessimist. I think all voices are needed to balance out what?s the reality from the average. I think that after this initial boom period, things will slow down radically again as the economy starts to lean back into a recession.

I am just hope that all these projects move to fruition before the financing window makes it more difficult.

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I definitely feel the fear about that. One thing that's helpful to keep in mind, however, is that with high interest rates usually comes a healthy economy. Development in the late 90s was fast-paced, because while rates were high, so were profits and stock prices etc. Naturally such is not seeming to be the future case for the US. That is another "ball of wax." As for investment in times with high borrowing costs, the amount developers are able to earn after the tax crediting on most city sites will offset somewhat the cost of interest. More important to look at are the historic indicators of what happens with high rates - how much are tax abatements able to offset the rates, how much can the market absorb the rates, how much will the rates actually rise?

Of course it's all still guesswork.

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Thats a good point Daniel. Its true that the feds monetary policy of adjusting the fed funds rate is usually to stimulate an economy growing to slow or to cool off an economy that is growing to fast. However, this time I believe that it is different because the nation is not operating at the theoretical "full employment" level to produce those kind of natural inflationay pressures. The unemployment rate my be low....but the unemployment ratio tells a differnt story. Plus...wages are not rising to the point that it should theoretically trigger this inflation. Rather, this inflation is caused by rising cost of energy and the shrinking value of the dollar...NOT A ROBUST ECONOMY THAT NEEDS TO BE COOLED DOWN by restricting the increase of credit money (bank lending) into the economy.

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I'm just saying the last time GR had a development boom (Late 80s, early 90s) interest rates were much higher

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I hear what you are saying. However, I think that period of building was partly financed by VERY rich people, who had millions of their own monies to invest into projects...which makes a big difference in getting bank banking. I do not think that the boom in condominium construction is fueled by the type of deep pockets that allowed the boom of the late 80

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the rates haven't risen to a point where they have increased markedly. surely we can say they are rising for "unfamiliar" reasons. that isn't to say they won't stop before they hit a watershed level, but there's still a chance they won't. however such a situation is definitely bound to happen unless we find a stable place in the world economy, and quit concentrating wealth with the wealthiest.

as for what happens in GR, the overhead is so low - as long as it remains somewhat so - the profit is pure. provided the city keeps its standard of services pretty high, it will be a safe bet any time. it's the very richest and very poorest places that will see the unexpected changes.

I hear what you are saying. However, I think that period of building was partly financed by VERY rich people, who had millions of their own monies to invest into projects...which makes a big difference in getting bank banking. I do not think that the boom in condominium construction is fueled by the type of deep pockets that allowed the boom of the late 80?s and 90?s, if you can call it a ?boom?.  It is easier to get financing when you have got names Like Devos and Van Andel co signing. It?s much harder when you don?t...especially when interest rates are high. Banks need more guarantees and are less likely to go on speculation and optimism of developers...unless they have deep collateral to back it up. Moreover, developers are likely to scale down projects based upon the cost of borrowing...they are not willing to assume those greater risk.

Rising interest rates generally constrains economic growth...that is why they are often purposely raised to cool down a hot economy...but out economy is not hot.

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