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Impact of Interest Rate Normalization on CRE Investment
Real estate investor concerns about rising interest rates may be overblown, with the likely increase to be much less than the consensus of economic forecasters and well below pre-2008 levels, according to CBRE research. Since the Great Financial Crisis (GFC), long-term interest rates have fallen and commercial real estate has been in high demand from investors.
Capitalization rates (yields) have fallen substantially, driving a substantial across-the-board increase in property prices. Since 2009, global commercial real estate prices have risen by 85%.
New analysis by CBRE suggests that real U.S. long-term interest rates will increase to only 0.9% in 10 years, much less than the consensus forecast of 1.6% or the pre-GFC average of 2.4%. With inflation stable at 2%, this equates to a 2.9% yield on 10-year U.S. Treasury bills, no change from the current rate. CBRE forecasts for nominal long-term interest rates effectively put a ceiling on the cyclical highs for short-term policy rates. This still implies higher policy rates than today, but well below pre-GFC levels
CBRE Global Chief Economist Dr. Richard Barkham says, “It is unlikely that the rise in interest rates will be anywhere near as sharp as some economists predict. Interest rates were falling long before the GFC, due to global demographic factors, and these powerful forces remain in play, limiting the extent to which central banks or politicians can hike rates. This is good news for real estate. As a consequence, institutional investors, who are loaded up on bonds, may struggle to meet retirement-income requirements in a period of sustained low real interest rates. As is now widely recognized, real estate is part of the solution.”
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