Time to be Thoughtful about Interest Rates
- Apr 20, 2011
There is no question that commercial real estate values have increased over the past 12 months. But how has this happened?
There is no question that commercial real estate values have increased over the past 12 months. But how has this happened? Have cap rates dropped and values increased because operating fundamentals have improved? Have rents increased dramatically or have your occupancy levels improved fundamentally? Is your 85 percent occupied shopping center now resting at 95 percent occupancy? The answer, amongst most of the property types in most regions, is a resounding ‘no.’
The correct answer lies in interest rates. Rates have dropped, debt has come back and the cap rate frenzy has taken off again. Today, utilizing a strategy of buying long term assets with a short term financing strategy is not only a mistake, but is fundamentally un-sound. We have multiple indicators and data that say interest rates are going to rise — and rise quickly — over time.
The U.S. Treasury has been buying 70 percent of all of our government bonds for the past four months. Yes, a whopping 70 percent. Our debt is at unprecedented levels and growing at a current rate of $1.5 trillion a year, we have begun to monetize our debts because we want to keep interest rates artificially low… but for how long?
Be careful, be thoughtful and let’s not make the mistakes of years past.