impact-of-rising-interest-rates-on-commercial-real-estate

The Impact of Rising Interest Rates on Commercial Real Estate

With interest rates being a major factor in commercial real estate returns, many investors fear what high rates, with cap rates following, could mean for their existing portfolios.

The Impact of Rising Interest Rates on Commercial Real Estate

With interest rates being a major factor in commercial real estate returns, many investors fear what high rates, with cap rates following, could mean for their existing portfolios.

In this blog, Excelsior VP of Investments, William George, addresses the impact of increasing interest rates and ways to minimize risks – and even find opportunity – in today’s economic environment.

Investment Approach is Critical

In the short-term, we have to accept a different interest rate reality; debt options are simply not as strong as they were 12 to 18 months ago. As such, it’s important to be disciplined on the underwriting side and account for this shift. More importantly, there’s an even greater need to focus on high quality properties located in exceptionally strong, resilient markets.

As an investor, you should not sacrifice quality for riskier assets or markets with the potential for higher returns in an environment like we’re experiencing today. Rather, you’ll want to invest in opportunities and locations that you feel confident in, regardless of the economic environment. Strong opportunities will continue to present themselves if you remain disciplined in your approach.

Offsetting Rising Rates

In the long-run, the current interest rate environment is not something to be highly concerned about. Lender spreads should naturally come in a bit to offset the increase in rates as demand for financing softens, and as volatility falls off. There could be some moderate cap rate expansion in certain asset classes or markets as liquidity tapers off, but it’s expected that demand (and therefore cap rates) will persist and continue to grow for quality assets in markets with strong real estate and demographic fundamentals (Nashville being a great example).

It’s also worth noting that if the growth in the area continues as expected, rental rates are likely to be substantially higher than what’s been modeled for in the later years. If that is the case, NOI is higher, which in return would offset the effects of a higher cap rate.

Our Strategy
At Excelsior, our investments’ success does not hinge largely on exit value, which is why there are still many strong opportunities, even if cap rates were to expand.

On the rental rate front, inflation is generally a favorable dynamic for landlords, and we are seeing this play out at some of our properties; therefore, we feel good about our ability to meet our debt service over the long term. We aren’t in multifamily where you can mark-to-market leases every year, but with almost all of our investments, we also aren’t dealing with 7+ year lease terms either. This allows us to gradually increase our rates and keep up with the market over time. Additionally, 90%+ of our leases have rental increases year-over-year as well, which helps offset some of the effects of inflation. (Learn more about rent rolls here.)

What does this mean for Commercial Real Estate Assets?

No one has a crystal ball, but when inflation starts to show signs of slowing (which many think is occurring now), and the events from Russia begin to stabilize, we should see much more stability across the economy and our debt markets.

The good news is – commercial real estate performance is much more closely aligned to growth than inflation. Inflation, in itself, is not critical for the asset class, and with long-term appreciation for most commercial properties, investors can rest assured that their investments are positively positioned for success, both now and when the economy recovers.

If you have any questions or would like to learn more about our investment strategy, please don’t hesitate to contact us!

Previous Articles

the-ultimate-guide-to-commercial-real-estate-investing

The Ultimate Guide to Commercial Real Estate Investing

Learn everything you need to know to assess the benefits of a commercial real estate investment and make the best decisions to get started.

Q1 2024 commercial real estate market update

Q1 2024 Commercial Real Estate Market Update

While we’re encouraged and cautiously optimistic about 2024, we see economic data implicating some near-term uncertainty as the Fed tries to moderate growth.

Tax Planning For Real Estate Investors

Tax Planning Tips for Real Estate Investors

Investing in commercial real estate offers numerous advantages, with a significant one being the potential for substantial tax benefits.

What Is Distressed Real Estate

What Is Distressed Real Estate?

The current real estate market has opened up a unique window of opportunity for investors looking to capitalize on distressed real estate.

Adapting To A New Commercial Real Estate Landscape

Adapting To A New Commercial Real Estate Landscape

Insight for Investors Navigating Today’s Market. In this brief, we’ve identified the biggest challenges faced in commercial real estate this year.

Real Estate Accounting Fundamentals

Real Estate Accounting Fundamentals

Real estate accounting plays a crucial role in the financial management of investment properties, and it’s important to be aware of…

Navigating Investments In An Election Year, Strategies for Consideration

Navigating Investments In An Election Year, Strategies for Consideration

Investing during an election year can feel like a daunting prospect, given the uncertainties and apprehensions that often accompany political transitions.

embracing-distressed-opportunities-in-today's-commercial-real-estate-environment

Embracing Distressed Opportunities in Today’s Commercial Real Estate Environment

A myriad of formidable obstacles has opened up innovative pathways to success.

The Benefits of Infrared Saunas, Red Light Therapy & Cold Plunges

Join us as we sit down with Kristen Nicholson, entrepreneur and owner of Nashville’s first contrast therapy studio, Urban Sweat. Kristen is a healthcare professional with a background in health administration…

Excelsior Capital

A real estate private equity firm that owns and operates high quality multi-tenant office assets in emerging secondary markets.

Interested in learning more about Excelsior's investment opportunities?

Excelsior Capital

104 Woodmont Blvd, Suite 120
Nashville, TN 37205

investors@excelsiorgp.com

Disclaimer: Under no circumstances should any information presented on this website be construed as an offer to sell, or solicitation of an offer to purchase any securities or other investments. This website does not contain the information that an investor should consider or evaluate to make a potential investment. Other materials related to investments in entities managed by Excelsior Capital are not available to the general public.

Share This