CARLSBAD, CA—There is likely a tipping point at which interest rates will have a greater impact on commercial real estate investors' decisions, but few experts have determined what that specific number is, Real Capital Markets' COO Tina Lichens tells GlobeSt.com. As we recently reported, heading into 2017, the majority of CRE investors are in a buying mode, according to the firm's national investor sentiment survey. We spoke with Lichens about the role interest rates play in CRE investment decisions and at what point rising rates might impact those decisions.

GlobeSt.com: According to your firm's survey, rising interest rates don't seem to be impacting many CRE investors' positions. What role do interest rates typically play in their investment decisions?

Lichens: Without question, interest rates play a role in an investor's acquisition decision. But interest rates are only one in a variety of factors that influence that process.

RCM's database of real estate investment principals is diverse, ranging from leaders of global capital markets investment firms to principals from entrepreneurial agencies and private family offices. Investment philosophies, approaches and mandates are as varied as that database of buyers.

For many, investing in real estate reflects an overall portfolio investment strategy. Allocations into real estate investments remain strong and very positive. An overarching theme is that sitting on the sidelines is not a preferred investment strategy.

Some investors may be sitting on significant sources of capital that must be deployed, or that must produce specified returns—returns that cannot be achieved by letting the capital sit idle. For others, there may be legal or other time-sensitive mandates shaping investment policies and practices. And, of course, there is a segment that are more rate sensitive.

GlobeSt.com: Do you believe there is a tipping point at which interest rates will have a greater impact on these decisions?

Lichens: The short answer is yes, there likely is a tipping point. Yet I am not sure that too many people in commercial real estate have determined what that specific number is. These small, incremental increases of 25 basis points imposed by the Fed will not cause a dramatic shift in activity. The reality is that comparatively speaking, interest rates remain at attractively low rates. Further, the increases will take place at a measured pace as everyone watches to see the overall impact, to real estate and many other facets of the economy.

One of the people we interviewed for the study, Brian McAuliffe, president of CBRE's capital-markets division, likened the recent movement in 10-year treasuries to 2013 when there was a nearly 100-basis-point increase in rates. His observation was that the market took pause for a time to reassess and recalibrate. We expect that just as it did then, and as it always does, the market will find its balance and respond accordingly to interest rates and other aspects of the overall economy.

GlobeSt.com: Apart from interest rates, what other factors are influencing investors' decisions?

Lichens: That's a great question, one that we asked our database of investors, both in the survey and in follow-up interviews. We asked the participants to identify which non-real estate issues were influencing their position. Almost 60% cited general concern for the US economy. More than one-third specifically cited the US interest-rate climate, while approximately 19% cited concerns over the US election. Also, 20% specifically cited various other reasons as influencing their decision. Global concerns, like Brexit and economic conditions in China, were cited by more than 10%.

Investors and their advisors also identified the outlook for growth in value as an important real estate consideration. A significant majority of investors we surveyed consider their strategies value add. The greater the potential value to add, the higher the likelihood of tolerance for higher interest rates.

Also of importance is the expected holding period of an asset. The general feeling is that investors who have a longer hold profile will be less impacted by a shift in interest rates and what some see as the potential for a slowdown in activity.

As one expert, Jay Olshonsky, president of NAI Global, told us, good real estate is good real estate, and when the opportunity to buy it presents itself, take advantage of it. Good real estate will produce solid returns over the life cycle of the hold; that return may incrementally change as a result of a shift in interest rates. At the same time, those returns historically will be higher than many of the alternative investment choices.

GlobeSt.com: What else should our readers take away from your survey?

Lichens: The age-old axiom “real estate is a cyclical business” remains as true today as ever before. For the last five to seven years, the industry has participated in a significant run that started with investors identifying and executing opportunities based on their specific strategies. Our conclusion is that opportunities will continue to exist and investors will still be active, even if at a modified pace as the market responds to the interest rate changes, a new presidential administration and many other local and global considerations.

Lichens: Without question, interest rates play a role in an investor's acquisition decision. But interest rates are only one in a variety of factors that influence that process.

GlobeSt.com: Do you believe there is a tipping point at which interest rates will have a greater impact on these decisions?

GlobeSt.com: Apart from interest rates, what other factors are influencing investors' decisions?

GlobeSt.com: What else should our readers take away from your survey?

Instant Insights /

When Will Rising Interest Rates Impact Investment Decisions?

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