When interest rates started to rise this spring, some analysts feared that commercial property values would either slow their rise or even start to fall. It appears that some of these fears are starting to be realised.
Green Street Advisors released its monthly index of commercial property values, and the report indicates that values have been flat for four months through August. The firm keeps track of commercial property values owned by real estate investment trusts. These properties tend to be weighted toward high-quality real estate in major urban areas.
This stalling in property values comes after a 6.6 per cent increase between January and May, when interest rates on a number of commercial mortgages rose one per cent. At the time, there was speculation that the Federal Reserve would ease its low-interest rate policies.
The Green Street report stated, “A sharp increase in interest rates has taken its toll on the four-year-long rally in property values.”
Cheap debt was one of the main factors behind the rise in values, along with slowly-increasing rents. With debt servicing costs on the rise, landlords buying property would have less income, which puts pressure on the amount that a property owner is willing to pay up front.
Over the long term, the outlook is not so bleak. Many investors know that commercial property is an inflation-resistant, if not inflation-proof investment. Even if interest rates rise, followed by inflation, rents and income will rise, along with prices.
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