Will Interest Rates Have More Effect On Deals Than Cap Rate?

With the strong prospect of a raise in interest rates, the question getting asked a lot is whether that will have more of an effect on deals than on cap rates. Writing for National Real Estate Investor, Diana Bell says that the current thinking is that “interest rate increases in 2017 are expected to have less of an effect on cap rates than originally predicted”.

Interest Rate Hikes May Have More Impact on Deal Volume Than Cap Rates in 2017

However, Bell notes that the impact may be elsewhere, saying:

investors should instead watch out for the effects that interest rate increases will have on deal volume.

She continues on, explaining that CBRE data shows:

Last year, investment activity levels of foreign buyers stemmed the effects that interest rate increases had on the market, so that cap rates either remained stable or increased slightly in the second half of 2016

And even though the industry sees a 75% chance of an interest rate hike (or more than one) this year, Ryan Severino, chief economist with commercial real estate services firm JLL thinks:

There has already been a good deal of cap rate compression this cycle, and as the Fed starts to raise rates there is still some room for spread, so I don’t think we will see a lot of downward pressure on cap rates this year. Until we start to see more clarity from government policy, we are probably going to see more of the same flat cap rate environment

Severino adds that “hotel and multifamily assets, which were the first to recover this cycle, should be eyed most closely for spread compression in light of the current flat cap rate environment”.

With so much going on in the market, it’s important to keep a careful eye on your investments and get expert advice on a good way forward. René Nelson at Pacwest Commercial Real Estate is the multifamily expert in the Eugene area. Visit eugene-commercial.com or give her a call today!