More Than Interest Rates
Everyone in commercial real estate knows that it’s a variety of factors that impact property value, property performance and ultimate asset success.
“Location, location, location” is the tried-and-true real estate mantra that will ALWAYS have relevance.
The list of factors impacting property value and performance is long and diffuse and includes excellent property management, a competent on-site staff and constant budgetary and performance review at the site level. So it’s a lot more than interest rates.
But when interest rates create the turmoil as they have over the past four to six weeks, all everybody wants to know is how much the change in interest rates is going to affect the value of their property.
Many think that when interest rates go up, as they have lately, that cap rates automatically go up right along with them. While this is generally true, the extent that cap rates increase is influenced by many factors…not just the Federal funds rate and interest rates as a whole.
In the video link found below, from Marcus & Millichap’s John Chang/Senior Vice President/Director of Research Services, Mr. Chang describes four factors that impact cap rates beyond the level of the Federal Funds Rate:
1). How much capital is in the market? A lot. The year 2021 saw a record number of commercial real estate (CRE) transactions occur exceeding the record set in 2019 by 30%! That’s huge.
2). Alternative investments to real estate. The S & P is down 16% compared to year end 2021 making the stock market less attractive than in years past.
3). Is there upside potential with a CRE investment? Value added properties (where rent increases are accelerating well above norms…industrial and multifamily) have certainly shown that.
4). Investment trends indicate that the demographic ‘baby boomer’ bubble, many of whom are retirees, is seeking reliable cash flow investments in the form of single tenant net lease investments.
Chang closes by saying that cap rates may be negatively affected in markets and property types that appreciated fastest in the last year (Salt Lake City multifamily) but generally speaking, the prudent investor will likely not see cap rates increase at the same pace as interest rates.
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