Now that the commercial real estate industry is pretty certain that interest rates will rise over the next couple of years, albeit at a slow pace, what does this mean for owners and investors in these properties?
A Forbes article points out that though REIT stock prices have fallen modestly as of late, their returns are still strong, coming in at a 13 percent average over the last four quarters. Additionally, office and retail vacancies are decreasing, loan defaults are down and hotels’ average revenue per room are on the upswing.
This source’s prediction is that the industry should continue well over the next couple years but could face sluggish returns when rates rise further in 2017. So investment could wane if and when this takes place.
But rate increases are already priced into commercial real estate transactions, argues David Lynn, founder of Everest Investment Property. The slight rate increases that the industry faces, at a total of below three percent by 2017, still means a very low cost of capital, he argues. Another thing mentioned is that there is not a direct parallel between rising interest rates and rising cap rates. Lynn says that supply and demand of capital markets plays a much bigger role in how funds are allocated.
Meanwhile, Peter Lazaroff, CFP, CPA at Plancorp says that REITs are still a safe bet, even with rising rates. His argument is that REITs have done well during periods of rising rates historically, and that could be because they really depend more on asset occupancy, rents and other fundamentals than the rate performance. These are all better when the economy is performing well, which is when rates usually go up.
Either way, interest rates are not expect to even break three percent by 2017, which is well below the average that the economy has dealt with for about 50 years.
As long as there are no unforeseen calamities that impact the industry, it doesn’t sound like those involved in commercial real estate have a whole lot to worry about.