Rise and Fall: How Interest Rates Impact Real Estate Values via Property Management Insider

It’s no secret real estate property values have benefitted from capitalization rate (cap rate) compression, due at least in part to declining interest rates. But investors worry that historically low interest rates could soon be a rearview mirror reality, leading to cap rate expansion. While forecasting future interest rate movement is tough, it is crystal clear that real estate returns moving forward will be much more reliant on improving fundamentals rather than further cap rate compression.

For multifamily, an early recovery sector, some folks worry that in addition to potentially unfavorable cap rate movement there could be another whammy around the corner — namely, slower NOI growth resulting from any future slowdown in rent growth. However, even with new completions rising, the national occupancy rate remained strong at 95.6% as of Q2 2014. So the overall U.S. market remains full, and pricing power remains with operators. In fact, since dipping to below 3% in 2013, annual rent growth among the MPF Research top 100 U.S. metros has actually reaccelerated (see Exhibit 1). While this may sound good on the surface, let’s dive into the question of “what if”.

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