Rising Rents to the Rescue?

WASHINGTON, DC—As we have discussed over the past week, interest rates are going to rise and construction costs are already on the upswing. One saving grace for real estate developers and owners would be an accompanying rise in rents.

Will that happen? The default answer to that question—and indeed most queries concerning commercial real estate—is that it depends on the market or even submarket and the asset class.

That said, respondents to our informal questionnaire were happy to take a whack at that issue as well.

Apartments doing well and by most measures are expected to continue to do so for the next few years. Rents will rise accordingly as demand continues to outpace supply—not that developers aren't scrambling to keep up with the demand.

Steve Fifield, chairman and CEO of Chicago-based Fifield Cos., points out that Chicago absorbed 2,000 apartment units downtown in the first half of 2014 versus 1,000 units in the first half of 2013.

In the Northeast, says Lawrence Goldstein, senior vice president at NAI Hunneman, a commercial real estate brokerage firm based in Boston, residential rents are rising moderately – but fast enough to keep up with rising construction costs and the possibility of rising rates. "Retail, industrial, and office are flat and we are not seeing the new construction in these areas," he tells GlobeSt.com.

Much depends on the market, says Lydia Stefanowicz, partner, Edwards Wildman Palmer, but in general she doesn't think rents are rising fast enough. "While demand for Class A industrial warehousing in proximity to large metropolitan areas has improved rents in that segment and some top urban office markets have strengthened, rent increases in many geographic areas remain weak," she tells GlobeSt.com.

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There are other scenarios related to these issues that we didn't examine that readers referenced.

For instance, Lee Kiser, principal of Chicago-based Kiser Group, notes that rising rates will upend the strategies companies are pursuing if they are predicated on cheap money—such as value-add development.

"Currently, CMBS is back to full strength and offering low-interest-rate, high-leverage, non-recourse debt on 10-year terms with a 1 percent assumption fee. The value play is to refinance with as high a LTV as possible right now."

Then there is the prospect posed by Dean Pappas, a partner in Goodwin's Real Estate Capital Markets Group. What if the Fed loses control of interest rates, he wondered. "What if the demand for Treasuries collapses and interest rates naturally float upward but the economy is not fully healed?

When presented with that particularly frightening future possibility, suddenly the status quo—rising construction costs and a rate hike on the horizon—seem a lot more manageable.