The Impact of Interest Rates on Real Estate Returns

July 09, 2015 | Stephanie Osten, Principal

As the U.S. faces a potential interest rate hike this fall, it is worthwhile to review the impact of interest rates on the real estate sector. This week’s chart looks at the historical performance of the NFI ODCE Index versus the 10-Year Treasury. The correlation between the two variables is positive but weak, owing in part to a time lag between the change in interest rates and when the change impacts property values.

A moderate interest rate hike after the Financial Crisis may be viewed as the Fed’s vote of confidence that we are seeing economic recovery. Factors that drive interest rates up — such as inflationary pressures from economic growth — cause real estate fundamentals to improve and potentially offset the negative impacts of rising rates. Additionally, we expect to see income rise as property managers pass on higher interest rates to tenants by increasing rents, thus providing a partial hedge against rising rates. While we are still in the initial expansion stage, economic growth and rising interest rates should prove accretive for real estate investments.