.png)
The commercial real estate market has seen some wild shifts recently, largely driven by the Federal Reserve's interest rate hikes. In 2022, the Fed raised interest rates multiple times to combat inflation, leading to rising operating costs for property owners. However, the impact on real estate has been nuanced.
To learn more about real estate investment strategies during times of rising interest rates, read the full article by Mike Packman in the New York Real Estate Journal.
Rising Interest Rates & Their Impact on Real Estate
With three rate hikes in 2022 alone, the Fed’s actions have reshaped the investment landscape. Historically, the 10-year Treasury rate has tracked closely with the Fed Funds rate, but recent market movements have shown relatively unchanged cap rates despite the interest rate increases.
For real estate investors, especially in the net lease sector, the inflationary environment hasn't been as harsh. Property owners with credit tenants benefit from these shifts, as tenants often absorb increased costs.
The Current Market: Cap Rates and 1031 Exchanges
Even with rising interest rates, cap rates for retail, industrial, and multifamily real estate have seen minimal change. As rates rise, cap rates typically rise too, but the adjustment has been slower than expected. Many buyers, particularly those in 1031 exchanges, continue to make investments at attractive prices despite the challenging conditions.
For some investors, leveraging debt is less of a concern. Buyers with all-cash deals focus more on unleveraged Internal Rates of Return (IRR) and can proceed with investments without the pressure of high borrowing costs.
The Bottom Line: Long-Term Strategy and Conservative Underwriting
Navigating through rising interest rates, inflation, and potential recessions requires a strategic approach. Investors should focus on long-term leases with creditworthy tenants and consider locations that align with tenant needs. In times like these, conservative underwriting and patience are key, especially for those in 1031 exchanges.
08/22/2022