WASHINGTON, DC—Opportunistic and value add properties are good assets to hide out in during a rising rate environment. Or possibly not, depending on one's perspective. But as we close out this conversation it is worth examining whether rising rates should be a reflectively feared.
Rising interest rates are, at their core, a reaction to an overheating economy that is manifesting itself in the form of inflation. If the economy is not seriously out of whack they are not necessarily bad, Marc Shuster, resident in Berger Singerman's Miami office and partner and co-manager of the Business, Finance & Tax team, tells GlobeSt.com. Property prices sometimes, or at least should, increase as a result, he says. "When the economy is growing, net operating income generation occurs, even if interest rates increase."
It is a subtle, but significant, change to the prism through which most people view interest rates. With that said, Shuster does agree that value add and opportunistic properties are better positioned in this environment—because they tend to have shorter-term leases.
"A shorter-term lease catches up or keeps pace better than longer-term," he says. "Plus the pass through component allows owners to pass expenses on to tenants."
The other side of this debate, though, is that rising rates increase the cost of debt service—and there is no hiding from that.
"Regardless of the type of asset, value-added properties will have the same increased costs of debt, no matter the use," Matthew Krauser, senior director at Integra Realty Resources' Northern New Jersey office, tells GlobeSt.com.
He argues that the market will probably not absorb these additional costs in the form of increased rents.
In fact, Krauser adds, "I don't think rising interest rates are good for any type of real estate investment. Whether it's an increase in debt service or operating expenses, increased overall expenses lead to a lower Net Operating Income which, in theory, will negatively affect the value of a piece of real estate."
Part 1 of this article can be found here. Part 2 of this article can be found here.
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