The Azucena Take: Interest Rates and the Economy of 2021 Pt. 2

Back in January, I broke down how rising interest rates are an indicator that the economy is recovering. This week, I want to go more in-depth about why rising interest rates are good for investors and the commercial real estate market.

The interest rate on the 10 Year Treasury Yield has gone from 0.55% in late July 2020 up to 1.5% as of March 2021. While a radical jump, it is still at an all time low. So, what is driving the interest rates? There are two things to look at.

The first is the response to the pandemic. As you know, the vaccine rollout along with the third stimulus has boosted economic outlooks. However, so much capital becoming available will result in inflation. Thus, the interest rates will rise to act as a counterbalance (keeping inflation below the desired 2% mark).

The second driving force is confidence in the economy. Investors are moving capital out of bounds and into growth investments like the stock market and commercial real estate. However, there is also a lot of uncertainty which is contributing to the rising interest rates.

That uncertainty is regarding the cap rates. One of the biggest misconceptions has been that cap rates move the same as interest rates. This has historically looked true if you look at the gap by the decades. Yet, looking at the data by the year-to-year shows that low-interest rates don’t result in low cap rates.

Even if interest rates do continue to rise, it will not push cap rates up. This will especially be true regarding momentum investments (such as industrial and apartments) along with recovery investments (like hotels, senior housing, and some retail).

Investors shouldn't worry about the interest rates and instead be focused on the value of their assets while preparing for the coming economic boom.