Though it will raise some headwinds for investors in the near term, positive economic trends should ultimately help boost commercial real estate performance. Conventional wisdom would dictate that a rise in interest rates would instigate an increase in cap rates, which ultimately undermines property values and weakens commercial real estate returns. There’s little doubt that rising interest rates inevitably exert upward pressure on cap rates.
Nonetheless, during inflationary periods, property owners benefit from an ability to push rents, resulting in increased property values through an increasing net operating income (NOI). After all, it’s the very hybrid nature of commercial real estate that makes it such a compelling investment option, with its steady and bond-like cash flow component, even during economic downturns, as well as an appreciation component that often acts as an inflationary hedge.
The inherent nature of self-storage and its short-term leasing only provides a further competitive advantage in this regard, by effectively affording investors in this asset class the flexibility to quickly and frequently adjust market rates through prudent revenue-management practice, complemented by proven recession-resistant demand characteristics for the product.
Although the debt and equity markets are once again on solid footing, the credit environment is not without risk, and volatility should always be expected. There are still many factors looming today, far beyond the layman’s control, which bring a level of uncertainty that muddies the water. This includes looming debt-ceiling discussions, geopolitical tensions in the Middle East, the effects of government sequestration, and declines in federal spending—all of which could hamper economic growth and disrupt the financial markets.
Regardless, the current demand for all commercial real estate, including self-storage, is being supported by the strengthening economy. Occupancy and rent growth gains remain strong, and supply risks, while increasing, remain minimal. Mortgage investors continue to have sharp demand for commercial-mortgage bonds, and credit spreads have remained stable while the Treasury market rallies, keeping borrowing rates near historical lows at present.
For the time being the historic window of low interest-rate borrowing remains very much open. If you haven’t done so already, perhaps it’s time to listen to the sweet sound of opportunity knocking and take advantage of this chance to refinance your assets into a long-term debt product that will ultimately help insulate you from any negative effects of a rising interest-rate environment!
Based in Chicago, Shawn Hill is a principal at The BSC Group, where he advises clients on debt and equity financing and loan-workout services for all commercial property types nationwide, with an emphasis on the self-storage asset class. He can be reached at 312.207.8237; e-mail firstname.lastname@example.org; visit www.thebscgroup.com .