It's unlikely that real estate will be permanently repriced if interest rates remain high for the long run, according to CBRE global chief economist Richard Barkham, in a report issued this week.
He said that inflation expectations should drop over the course of 2023 near the Federal Reserve's 2% target.
"The real interest rate, determined by the supply and demand for capital in the global economy, likely won't rise significantly due to demographic factors," Barkham said. "The term premium is small and should remain constant."
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CBRE estimates that the 10-year U.S. Treasury yield will increase to around 3% from the 2.2% average over the past decade but will not be large enough to materially alter the investment landscape or fundamentally reset real estate asset values in the long term.
Barkham added that sharply higher interest rates will weigh on the U.S. economy in 2023, house prices and retail sales will decline, and unemployment will rise.
Rates to Stay Flat, Or Rise
Paul Fiorilla, director business intelligence research, Yardi Matrix, tells GlobeSt.com, that unless there is a hard-landing recession (which creates its own problems), rates are likely to stay where they are now or go higher.
If they do rise, "that will certainly have an impact on property values," Fiorella tells GlobeSt.com. "Values shot up in recent years partly because the cost of capital was so low, with mortgage rates at historically low levels in the 3% to 4% range.
"Now debt coupons are up to the 5% to 6% range, hedging is expensive, and leverage is generally conservative. Unless that changes, acquisition yields/cap rates have no choice but to increase from current levels."
Fiorilla said that cap rate increases will be mitigated to some degree by increased rents in some property segments, "but the market can't function very well for long with negative leverage, if there isn't a balance between risk and returns.
"Long-term, I have no doubt that the market will adjust to any interest-rate scenario. CRE is a mature asset class, a much-needed part of the economy, and it has taken its share of punches and come out OK through many different cycles.
"That said, the next couple of years will probably be a period of adjustment as players get used to a new pricing and capital landscape."
Residential Market Seen Differently
Ray Costello, Managing Director, Property Inspect US, tells GlobeSt.com that what is happening and is going to happen in commercial, retail and the office market is very different than what we are seeing and anticipating in the residential market regardless of yield increase.
"Fundamentally resetting real estate asset values is a broad statement, when there are asset classes within that are seeing, understandably, varying data year-over-year," Costello said.
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