Is It Time to Worry About Rising Interest Rates?

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The Federal Reserve is likely to raise short-term interest rates later this year for the first time since 2006. Will it throttle the commercial real estate boom? That’s a multibillion-dollar question for investors. Real estate insiders talk about the rate hike the way doctors talk about wine: healthy in moderate doses. Even if higher rates increase the cost of borrowing, the argument goes, they reflect an improving economy, which should boost rental income and, in turn, property values. So no reason to worry? Not quite.

At a speech at the Yale Alumni Real Estate Association’s national conference last week, Blackstone Group’s real estate COO Kathleen McCarthy argued that historically, rising interest rates have coincided with rising property values. The data McCarthy and other optimists point to is shown below (courtesy of Forbes). Five times over the past few decades, interest rates (measured as 10-year treasury bond yields) hit a nadir and then rose noticeably. In all these cases, the NCREIF National Property Index (a benchmark for commercial real estate yields) showed positive returns while interest rates rose.

But let’s revisit a basic observation: commercial real estate markets move in cycles that can only last so long. All other things being equal, if real estate prices have been rising nonstop for nine years, they are generally more likely to fall soon than if they have been rising for only three years.

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Authored By Konrad Putzier – See the Full Story at The Real Deal

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