How will higher interest rates impact CRE returns?

Investors are faced with a changing CRE landscape amid an aggressive rate hike cycle. We explore the implications of higher financing costs, and potential new strategies to capture value.

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August 10, 2022 | 15 minute read

As markets adjust to the most aggressive rate hike cycle since the early 1980s, CRE mortgage rates are feeling the impacts. What does this shift to higher financing costs mean for investors? We evaluate CRE fundamentals amid a new backdrop and explore why investors might consider a shift in focus from CRE equity to debt in our latest research note.

Key takeaways

  • CRE mortgage rates are rising significantly as the Fed acts aggressively to combat inflation. This follows a two-year period during which record-low rates helped drive annual property price gains near 20%.
  • Market fundamentals are solid, and we believe most sectors appear resilient even in the face of an economic deceleration.
  • Higher financing costs act to shift income from property owners to lenders, altering the risk-return balance in favor of debt over equity, in our view.

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Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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Andrew Korz, CFA

Executive Director, Investment Research

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