Industrial Spreads Can Absorb the Rising Rates

Sam Chandan

Real estate assets in the highest demand and narrow spreads will likely not see much of an impact from the rising interest rates. Industrial assets, which have become the darling of commercial real estate, in particular will absorb rate increases into the spread. On the other hand, assets with wider spreads and less demand, specifically the retail class, will have more difficultly absorbing the interest rate increase and rising costs of capital into the spread.

“The industrial sector, all things being equal, will absorb the rate increases into spreads to a greater degree than will be the case for retail properties, which will see more upward pressure on cap rates and borrowing costs, in spite of the fact that retail cap rates are already higher than they are for industrial,” Sam Chandan, the founder of Chandan Economics, a Dean at NYU SPSSchack Institute of Real Estate and a partner at CapriCapital. For investors that have significant industrial property holdings, the impact of higher interest rates on the values will be more muted.”