Natural interest rates: Implications for property from the long-term outlook for interest rates
A key question for real estate investors is, “Where are interest rates headed?” This is a question I have received regularly during my 25-plus years as an economist focused on the real assets sector. The path, direction, and absolute and relative levels of interest rates are of concern to property investors because the value of any commercial real estate asset hinges on future cash flows that have to be discounted to the present. Any discount rate used is ultimately a function of the risk-free or benchmark interest rate.
Commercial real estate, like other real assets, is also a highly capital-intensive asset class and, therefore, the use of leverage is necessary and often key to generating pro forma returns. As such, real estate’s idiosyncratic nature renders it highly sensitive to any movement in interest rates. The outlook for interest rates has been a major determinant of whether a specific property acquisition meets investment committee hurdles and i