The high rate of inflation and the Fed’s plans to raise interest rates could slow the commercial real estate sector’s momentum.
While the U.S. commercial real estate sector continues to perform extremely well, today’s macroeconomic environment has created some new sources of stress for industry investors. For many years, we have lived in a low interest rate environment, which served as a boon for the sector by both making it an attractive, high-yielding alternative to other types of investments and by bringing down the cost of transaction financing. But for the first time since 2018, the Federal Reserve has raised interest rates this spring—during two separate meetings by a total of 75 basis points. And the Fed has warned that, in an effort to curb inflation, it will likely raise rates several more times throughout 2022.
For the most part, market experts don’t anticipate that this move will significantly constrain debt availability, though the cost of borrowing for commercial real estate transactions has gone up a bit since March. That being said, at a time when cap rates on some property types, in particular multifamily and industrial, are extremely low, investors participating in these sectors will have to be careful that these deals will still pencil out in an environment with rising interest rates. Moreover, as our net lease research study (page 32) indicates, commercial real estate lenders may tighten financing terms for property types and borrowers they view as carrying more risk.