Will Higher Rates Mean Lower Values?

September 21, 2015

It’s been more than six years since the Federal Reserve put its benchmark interest rate close to zero as a way to bolster the economy. It’s a policy that has brought recovery and greater returns to the commercial real estate industry since 2008. Now, policymakers say that policy is about to change.

The New York Times reports that Janet L. Yellen, the Fed’s chairwoman, is predicting that the central bank will raise interest rates later this year. With scheduled meetings in October and December, change could happen quickly, and a new study from accounting firm EY reports that the impact on the commercial real estate industry may surprise many.

Though many commercial real estate investors, developers and lenders anticipate that values will take a hit when interest rates rise, the EY study finds that the Fed’s initial adjustments will have a marginal impact on commercial real estate valuations and investment momentum. Its authors point out that cap rates and interest rates aren’t always correlated.

Of the many factors impacting cap rates and real estate values, demand and supply changes, transaction activities and economic trends all bode well for the current market. Commercial real estate fundamentals are strong, and there are record amounts of inbound capital and available private equity for investment. These drivers will support current real estate values, even in the face of rising rates.

The EY study predicts that, if any negative consequences are to come, the rate increase is most likely to make it more expensive to develop new projects and refinance certain debt. The policy change could also cause a possible reactionary sell-off in publicly traded real estate investment trust (REITs).

Intelica Commercial Real Estate continues to monitor the Fed’s activities and their impact on the lending environment and commercial real estate valuations. For guidance on your next investment, purchase or sale, contact our team of market experts.