That’s interest rates folks, not the elevator.
Prior to Trump’s tariffs and Mid-East war, they were headed in the opposite direction; down.
Generally speaking, lower interest rates are good for CRE investors. As the cost of money declines, the buyer pool usually increases.
More buyers translates into greater competition for properties with a corresponding salutary effect on prices.
Rising rates usually have the opposite effect.
So, despite all Trump’s jawboning about how America should have the world’s lowest borrowing costs, it appears his ill-conceived policies at the border and abroad are helping move things in the opposite direction.
Of course, there are contributing factors such as the current AI buildout and staggering amount of private sector borrowing fueling it; not to mention our $40 trillion+ national debt.
To help better visualize this, putting dollar bills end-to-end, it ‘only’ takes $960 billion to reach the sun. $40 trillion equals $40,000 billion; that’s a lot of trips to and from. And most of that has been accumulated in the last 16 years, starting with Obama.
Think that’s sustainable? The bond market doesn’t. That’s why it is making a joke of Treasury Secretary Scott Bessent’s buyback program.
He dared the markets to bet against him. Bond traders did and appear to be winning. Guess he’s not the ‘house’ after all.
This is strange coming from a man who made his bones in the financial markets helping George Soros “break the pound.”
Bessent’s research contended the British pound was artificially inflated due to government manipulation which could not be sustained.
Now, with his turn in government, Bessent is doing exactly the same thing. However, this time he’s on the losing side of the transaction.
Fealty to Donald Trump comes at a high price: his intellectual integrity.
This time around, there appears to be no place to hide. Interest rates are on the rise globally.
During the pandemic, most developed nations took advantage of global central bankers’ decision to artificially suppress interest rates to go on a borrowing and spending spree. Now those chickens are coming home to roost; in our case over $40 trillion worth.
So now you have a collision between rising inflation catalyzed by Trump’s blunderbuss trade war and hot war in the Mid-East, swollen government spending and runaway corporate borrowing.
With mountains of debt accumulating everywhere, a broadening of the Mid-East conflict accompanied by higher energy prices, rates have to go up; more risk and fear mandates greater reward.
What does all this mean to CRE investors? A lot. The cost of money going up will have sweeping implications throughout the economy. This is particularly true where housing is concerned.
We may very well be returning to a pre-pandemic environment when rates were not artificially suppressed by central bankers.
Therefore, dependability and potential consistency of income may be prioritized over less likely cap rate compression and possible appreciation.
DSTs can provide just that with a plethora of institutional quality tenants on long-term leases.
With dark clouds having already gathered on the horizon this option may be worth considering.
