Will Rising Interest Rates Damage Commercial Real Estate Value?
In a fast and concise analysis, Bill Conerly of Forbes.com examines whether the rise in interest rates, particularly with commercial mortgages, automatically translates into a drop in commercial property value. Conerly explains that your decision-making all depends on whether you take an internal or external view of the process.
How can this logic be wrong? Why doesn’t the table show clear real estate losses when interest rates rise? Interest rates on mortgages, bonds, and other long-term debt are not set by the whims of fairies. They are determined by two factors: inflation expectations and economic growth, which combine to set the supply and demand for credit. Interest rates only rise when the economy is strong or inflation is accelerating (and inflation is most likely to accelerate when the economy is strong). At these times, investors are confident. Their animal spirits are up. They borrow more because prospects for investments look good. The factors that push interest rates up are the same factors that push up investment values. Interest rates rise because of strong investment demand.