Boston, Massachusetts, resident Michael Snedeker is a commercial real estate developer. To stay up to date in his career, Michael Snedeker keeps up with developments in the real estate development world such as interest rate increases.
Following the March 2018 interest rate hike by the Federal Reserve, the sixth hike since December 2015, many commercial real estate developers became worried about long-term property values. The concern is understandable, considering interest rates have a significant correlation to capitalization rates, which is the potential rate of return. Therefore, an increase in interest rates often leads to an increase in capitalization rates which can then lead to lower property values.
However, interest rate hikes do not always hurt property values. There have been historical deviations. This is why it is important to factor in the cause of rising interest rates. If rates rise because of a stagnant economy or a drop in the amount of credit available, then it’s bad for real estate. However, if rates rise because of a strengthening economy, job creation, low unemployment, and higher corporate earnings, as is the case today, these gains can drive demand for real estate, thus offsetting the effect of rate hikes.