The last week has seen an amazing proliferation of researchers and journalists cogitating on the impact of rising interest rates on commercial property values. It's a critical issue for our industry. But it's hardly new or unexpected or unexplored. The countercyclical influence of low interest rates on values is beginning to ebb; for many risk-averse investors and lenders, understanding the magnitude of that influence was most important when it was approaching its peak. In some segments of the market, cash flow will lag adjustments in the cost of capital with significant implications for property value trajectories. However inconvienient, the time for making that connection and raising a flag is in the rearview mirror, even if it's only now becoming good copy for the national broadsheets.

January 2011—If baseline measures of debt capital costs climb, property values, borrowing costs, and lenders' loss-mitigation strategies will each have to adjust in ways that will temper current investment trends (Chandan, New York Observer)

June 2011—Major markets' current property price trajectory suggests that accommodative monetary policy is now overly impactful and is distorting investor behavior to the market's long-term disadvantage (Chandan, GlobeSt)

July 2011—Too many investors and lenders underestimate the drags on value if interest rates should rise ahead of cash flow (Chandan, New York Observer)

August 2011—Current debt yield trends reflect valuations that have outpaced underlying property cash flow, in part because of low financing costs, and in a manner not observed before (Chandan, New York Observer)

The influence of current monetary policy and artificially low costs of capital on property values has been observable for some time. The linkages are not consistent, which has served as fodder for both hawks and doves. In some markets more than others and for some property types more than others, low risk-free yields and debt servicing costs have played a bigger role. In the most extreme cases, where institutional arrangements and market structures have supported efficient transmission of monetary policy, we have seen the primary driver of value shift radically from fundamentals to leverage over the last two years.

January 2012—A shift in conditions characterized by higher interest rates bears implications for the management of distress, the cost of financing, and for commercial property values (Chandan Economics Special Report)

February 2013—Low interest rates are our favorite poison right now … You look at certain asset classes, commercial real estate being one of them, where there are real distortions being introduced (Chandan, Bloomberg Television)

May 2013—In too many cases, apartment fundamentals have taken a back seat to low-cost capital as the main driver of value (Chandan, GlobeSt)

While disagreements over the magnitude and timing of the rate-value connection are inevitable, the basic issue has been at play for some time. Alongside fiscal policy and economic uncertainties, it's the most important issue we have been working with investors and lenders to incorporate into their portfolio strategies. Some degree of foresight is important. The strain on values from rising rates may be prospective; many of the investment decisions that are undermined by higher rates have already been made.

A two-year retrospective on the discussion of the interest rate—property value connection

Instant Insights /

Starting to Think (or Write) About Interest Rates and CRE Values? You're Late.

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