How Will Interest Rates Impact Real Estate Values?
Hello. I'm Brandon Karr with Marcus & Millichap. I lead the Karr Self-Storage Team in our Fort Worth, TX office and in our latest 'Ask the Broker' video, we wanted to talk a little bit about how interest rates could impact the value of your self-storage real estate moving into the 2nd half of 2021 and beyond.
During its April 27 policy meeting, the FOMC left interest rates unchanged and reaffirmed its commitment to keep rates low until the economy has recovered more fully from the pandemic. This is good news for owners and sellers of income producing real estate because - all things remaining equal - low interest rates result in higher property values, and higher rates equate to lower values. With that said, rates are already at historical lows and the general consensus is that they will move higher as the economy gets back to pre-COVID levels of activity.
The question then becomes: when will this happen?
Well, the two biggest factors impacting the outlook on long-term interest rates are economic growth and the likelihood that such growth will lift inflation higher. When inflation becomes a concern, the traditional response is to raise interest rates. And as far as economic growth is concerned, activity is expected to rebound in the summer as the vaccine rollout helps slow the spread of COVID-19, allowing businesses and consumers to begin getting back to normal. Inflation is indeed likely to move higher as growth accelerates. Concerns about inflation risks first began to surface as Congress debated the $1.9 trillion fiscal stimulus package in February, w/ many experts warning that the magnitude of the stimulus could push the economy past its potential. To be sure, prices for goods and services across the country have already begun to rise. In many states, the cost to fill a vehicle with gasoline has increased by almost 50% since the beginning of the year. Groceries, on average, have also increased by almost 4% during that same period of time. And that's just on the consumer side of things.
Real estate developers have also been hit hard recently.
The year-over-year cost of lumber has increased by more than 375% and the cost of steel is 3x higher than its 20 year average. Financial markets have clearly begun to notice, and they are responding to this stronger growth environment accordingly. As an example, the yield on a 10-year Treasury note (which happens to serve as one of the primary foundations upon which commercial mortgage rates are based) rose from just above 1% in late January to 1.75% at the end of March. While it is true that rising inflation can result in higher property rental income, particularly in the self-storage industry - where leases are executed on a month-to-month basis - if you are thinking about selling one or two years from now, we encourage you to seriously consider the possibility a higher interest rate environment could actually mean your property won't command as much in the marketplace as it would today - higher rents notwithstanding.
Not to mention what the implications could be should any number of President Biden's tax proposals become law. But that is a topic we will cover in a forthcoming video blog. For the time being, we will continue to try and provide you with the best research and strategic advisory services possible so that you are in a position to make the right decision at the right time - whenever that might be. And whether that includes buying, selling, refinancing, or holding, the Karr Self-Storage Team is here to assist and we look forward to speaking with you personally in the near future.