News & Opinions
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Strengthening Economic Activity Seen Offsetting Investor Concerns Over Interest Rates
Mark Heschmeyer / CoStar / August 7, 2013
Although Cost of Borrowing May Go Up, Investor Risks Appear Low
Analysts believe it is becoming more and more likely that commercial real estate loans coming due in the next few years will face a higher rate environment. However, the strengthening economy is expected to offfset near-term investor risk.
Two notable commercial real estate developers and investors support the assessment that property fundamentals are catching up to the valuations created by strong capital flows into the property markets.
Owen D. Thomas, CEO of Boston Properties, said, “If interest rates go up it’s going to be because the economy is improving and, therefore, demand for real estate will go up and rents will go up.”
Steve Schwarzman, chairman and CEO of The Blackstone Group, also noted in his firm’s most recent earnings call that rising interest rates are not necessarily a negative, pointing out that when interest rates rise in tandem with better economic activity, the result is higher cash flows for most properties.
Schwarzman pointed out that, in the years in which interest rates rose during the past 20 years and in each of the following years, real estate values also increased between 4% and 15% on an annualized basis, in both the private and public markets.
“So the premise of investors and their concerns on the real estate side are basically belied by the facts,” he said. “Our business returns benefit from strengthening economic activities.”