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A Shelter from the Storm of a Looming Recession
Posted 6/3/2019
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The economy has been seen historically low interest rates for many years and for the greater part of this current economic cycle. The question is how long will these low rates last? Experts have been forecasting increased interest rates for the better part of seven years and in 2017 their prediction came true. The Fed began raising short term interest rates (the Fed fund rate “FFR”) and the ten-year Treasury followed suit. Fast forward to today and we have the FFR sitting at 2.5%, well below where many predicted it would reach. Furthermore, the Fed is signaling a halt to future increases and even the possibility that a rate cut may be in the cards. The ten-year Treasury rose along side the FFR, albeit not at the same pace causing a flattening of the yield curve. Recently the ten-year Treasury began dropping as the result of several factors, most notably the trade war with China. As of May 2019 the Treasury now sits in the low 2% range, marginally above the historic low of 1.71% reached in 2016. Thus, the talk of increasing interest rates seems again to be overdone.

Why would someone recommend locking into ten-year fixed rate money when there does not seem to be an immediate threat of interest rates rising? The answer is not to time the interest rate markets, but rather to hedge against a potential recession as this cycle inevitably comes to an end. As we enter the tenth year of this cycle, we are currently experiencing one of the longest periods between recessions in our country’s history. The next recession may be one year, three years or even five years away. Although, no one knows, history tells us its not a question of if, but when.

Long term fixed rate debt is a great way to weather a recession storm. Today borrowers can lock into ten-year, non-recourse, fixed rate debt in the low 4% range with significant interest only periods if desired. Not only does this strategy allow the investor to lock the interest rate at historical lows it allows for ten years until your next refinance. This important because it allows the investor to weather the storm when the recession hits. No investor wants to be forced to transact or refinance during a recession. Placing ten year fixed rate debt on your storage facility at this point in the cycle should allow the next recession to have come and gone prior to your loan maturing. Consider ten year, fixed rate debt your shelter during the storm of the next recession.

Devin Huber is a principal at The BSC Group, a Chicago-based commercial real estate financing firm, where he supports self storage owners nationwide with their lending needs. He can be reached at 312.207.8232 or Learn More

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