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How Rising Interest Rates are Good for Real Estate Investment

  

As we face rising interest rates, inflation, and mounting concerns of a potential recession, many investors across the country are looking for safer ways to invest their money, mitigating their overall risks. Some are restricting their budgets in order to reduce their overall exposure, but in doing so they may miss out on some of the fastest-moving opportunities in our current market, retail real estate assets.

 

Rates Are on the Rise, But Still Low

The Fed recently announced a considerable increase in interest rates, making for the largest increase since the early ‘90s; however, the overall rate is still low when compared to relatively recent historical highs. Compared to the late ’70s and early ’80s, when interest rates hit a high of around 20 percent, current interest rates are still at a reasonable level. 

 

The continued demand for land, for housing, and for commercial use, continues to propel rental prices upwards, which can help to offset the effects of inflation. This means that as the nation continues to face increasing inflation levels, landlords could find themselves benefiting in the long run, provided they are partnered with the right, quality tenants. As the saying goes, “retail follows rooftops”, and in growth markets, retail space continues to draw demand from operators all over the spectrum. 

 

Worried About Inflation? Invest in Real Estate

If the current rising interest rates and building inflation poses a serious concern for you, then real estate may be an ideal option. Historically, real estate has always been a strong hedge against inflation, for a few reasons. 

 

First, owners of land and properties “should” see an appreciation of their properties in line with the rate of inflation, as the value of land tends to keep pace with inflation. Additionally, with fewer active developments occurring due to the rising costs of labor, materials, and machinery, the overall supply drops, driving up demand further. This demand increase leads to further appreciation of land value, as well as raising the rent rates - at a high level; there is only so much developable real estate on the planet, which derives its value through scarcity & inherent limits to its supply. 

 

On top of this, rent rates will likely continue to increase, in efforts to maintain profitability as inflation increases. Landlords will continue to raise rents to offset the costs needed to maintain their properties and pay for any labor or materials necessary, which in turn tends to also contribute to the rise in the value of the same property. 

 

Another factor that can make this a better time to invest in retail is the fact that payments on a fixed-rate mortgage are just that, ‘fixed,’ so the payments being made remain constant while equity growth accelerates due to increasing rent rates. Additionally, any potential inflation can reduce the true value of the future money owed, leading to more profit. 

 

In an erratic and shifting global market, real estate that is privately owned, of high quality, and provides a stable income stream will make for a tremendous investment opportunity. 

 

Discount Retail Will Reign Supreme

Just as we saw during the initial months of the pandemic, rising interest rates, inflation, and possible recession will result in consumers reducing overall spending, and tightening their budgets. As consumer spending habits shift, the two types of retailers that will be able to more easily weather the storm will be high-end retailers, and discount retailers. 

 

High-end retailers will be able to get by, although they may face increased shipping and production costs, because their end consumers are typically a level of wealthy that inflation and recession does not affect day-to-day life. These shoppers do not need to change their spending habits, and can continue to patronize these retailers. 

 

In these circumstances, it is typically the mid-range retailers that are hit the hardest. Their clientele are the shoppers that will be drastically affected by rising inflation, and attritional elements of a recession. Many of these shoppers will reduce overall spending, cut down on shopping trips, or transition away from their preferred retail options for discount retailers. 

 

In light of this, discount retailers stand to strengthen their position in the face of a recession, as they will not only retain their normal customer base but can also gain new customers in shoppers tightening their budgets.

 

As Retail and Commercial Real Estate Continue to Thrive, We Will Enter a Seller’s Market

As inflation continues to build, the real estate market will push on, but buyers of commercial assets will no longer be able to overpay for properties at the outset, an important consideration for sellers in this new market. This will create a seller's market in the future that will benefit any individual holding real estate, especially those of high quality, and any with retailers in good standing. 

 

>> Click here to view our current properties for sale. <<


Byline_Brendan_Jost

 

Brendan Jost >

Acquisition & Dispositions Manager

Brendan Jost serves as the Acquisitions & Dispositions Manager at SimonCRE. He plays a vital role in the day-to-day management of the company's disposition pipeline and investment sales team.

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