Over the last month, short-term interest rates have risen to their highest levels since October of 2008. Federal Funds futures nearly tripled over the last month with the expectations that the Fed will continue to raise interest rate at least twice throughout the year. According to “The Bond King”, Jeffrey Gundlach, CEO of Doubleline Capital. “I expect a rally on the 10-year and the 30-year, to below 2-1/4 at a minimum on the 10-year, maybe a little bit lower than 2 and then it moves back up.” What does this mean for commercial real estate? Although it’s typically not in perfect correlation, rising interest rates will affect cap rates for various types of commercial real estate properties. The low-interest rate environment over the last 8-9 years has forced cap rate levels to the lowest point in several decades.
How should real estate investors react? For investors that intend on holding assets in their portfolios for the foreseeable future, now would be a good time to consider locking in long-term financing. Although interest rates have ticked up from the bottom of the market, they’re still at historical lows. The Fed has already indicated 3 rate increases this year. As interest rates increase, so do cap rates. Rising cap rates will push values down thus making it harder to refinance a property at previous valuations.
Throughout history commercial real estate has proven to be a solid hedge against inflationary pressures. There are still opportunities available for both buyers and sellers in this space and the best advice is to understand the macro economic impact in a rising interest rate environment.