September 21, 2023

For more than a year, we’ve seen interest rates rising. Now that they seem likely to stabilize, what does that mean for the market?

Higher interest rates are associated with lower asset values. We’ve seen that playing out over the last year. But this relationship isn’t always as simple as it appears.

It’s not just higher interest rates that reduce short term demand for assets. It’s also changing rates. When interest rates are still going up, investors are less likely to deploy their capital because they don’t know what the risk free rate will be in the near future. It’s often easier to wait and see, and this suppresses asset demand.

While prices have been falling, transaction volume in the real estate market is also way down. This reflects some simple psychology. When prices are falling, property owners also prefer to wait and see. Maybe interest rates will reverse and prices will rebound.

Lower transaction volume in the real estate market has been a key feature of the past year. As interest rates level off, I expect this trend to shift.

More interest rate clarity means that investors can deploy capital with a greater understanding of how their investments are likely to perform. Property owners who wish to sell will have more reason to believe that they’re being offered fair prices.

Stable rates should drive greater price discovery and transaction volumes.

I also expect we will see differences between sectors. Alliance’s favored Medical Office Building (MOB) sector has held up much better than retail, for example. Prices are nearly always a function of supply and demand. Demand for MOB has held up well, even with higher interest rates. And supply has not increased as quickly as demand.

Alliance knows how to invest in any market conditions. Part of this is our sector expertise and excellent valuation skills. Another part is that we don’t just find winners, we make them.

Agreeing on a price is just the start of a successful investment. Our value-add after the deal is just as important. Alliance has a fantastic track record of adding value by finding and retaining high quality tenants and executing high-value lease renewals with rent escalators that protect our long-term position.

Stable interest rates mean a new phase in the market. Capital may become a little cheaper as banks no longer need to build in an interest rate cushion to account for future increases. Property owners who have been waiting to sell may finally accept new market prices. More deals should go through, and that is generally good for everybody.

There are always opportunities, but I believe a period of stable interest rates will accelerate deal making on the market and present new opportunities to bring value to Alliance’s investors.

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