Real estate investors commonly think lower interest rates will boost the values of their properties. They may describe real estate as “like a bond” simply because real estate returns include strong, steady net operating income. And, yes, lower interest rates do boost the values of most bonds. But that’s because bonds are fixed-income assets. Short of default, bonds return a stream of payments based on a fixed interest rate. If market interest rates decline, investors want existing bonds whose payments were contracted at higher interest rates, and they bid up the values of those bonds. Real estate, though, is not a fixed-income asset; it is an equity asset, like stocks or private equity, whose returns are driven primarily by the net income that flows to its owners.

The key insight is simply why interest rates vary — they go up because the economy is strengthening, and they go down because the economy is weakening. Market interest rates respond to the balance between de