Will Rising Rates Damage Real Estate Returns?

August 24, 2018 | Jeremy Zirin, CAIA, Senior Research Analyst, Real Assets

Our chart this week examines the historical1 total returns of the NCREIF Property Index (“NPI”) during times of rising interest rates. As illustrated in the chart, real estate has historically showed little correlation with interest rates indicating changes in interest rates do not immediately translate to asset prices. In fact, the average annual total return during periods of rising rates is 12.3%; typically rising rates are accompanied by stronger economic growth and/or inflation, both which inevitably draw investors to real assets. It is important to keep in mind, however, that private real estate is valued less frequently than its publicly traded (daily valued) counterparts. This is important because changes in private real estate prices will typically lag changes in interest rates as a result of less frequent valuations.

With interest rates expected to rise further, the spread between the 10-Year Treasury and real estate cap rates will continue to shrink, but strong fundamentals – such as rent growth and economic growth – are much more important than movements in the 10-year Treasury. There is no magic number for the 10-year that would trigger a re-pricing of real estate, but some property types are more susceptible to higher rates such as those with longer-term bond-like leases. Going forward, we believe that a mix of strong fundamentals mixed with stable rising rates will translate into moderate, income-driven returns to core real estate in the mid to high single-digit range.

1Since inception

Print PDF

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

 

Jeremy Zirin, CAIA
Senior Research Analyst, Real Assets

Get to Know Jeremy

Related Content

10.18.2018

Italy Looks to Increase Its Budget Deficit

The yield on Italian 10-year government bonds has risen this year as investor concern about the country’s fiscal policies mounts….

A Shining Light for China chart displaying MSCI A-shares

10.12.2018

A Shining Light for China?

On September 25, MSCI, Inc. — a leading global provider of research-based indices and analytics — announced its plans to…

Are Small-Cap Equity Opportunities Disappearing

10.04.2018

Are Small-Cap Equity Opportunities Disappearing?

In 1996, there were more than 8,000 companies listed on U.S. stock exchanges. Today, that figure is less than half….

10.04.2018

3Q 2018 Market Briefing

Live Webinar – Thursday, October 18, 2018 – 1:00-2:00 PM CT

09.27.2018

U.S. Petroleum Production Surges

U.S. crude oil production peaked in November 1970 at just over 10 million barrels per day. That record stood until…

Can Hurricanes Drive Inflation Higher

09.21.2018

Can Hurricanes Drive Inflation Higher?

Given the most recent hurricane to hit the U.S. — Hurricane Florence — our chart of the week examines the…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >