US survey: Impact of rising interest rates on CRE

Key survey questions included:

• How likely is a recession in the United States within the next six months?

• What will be the depth and length of the recession?

• How much will the Fed Funds Rate fluctuate by the end of the year?

• What pricing adjustments have you made given the interest rate increases throughout 2022 by the Federal Reserve?

• What Cap Rate do you expect over the next six months?

• How much do you expect Cap Rates to increase?

• Expected increases in the Internal Rate of Return (IRR)?

Survey highlights

Consensus forms around recession expectations

• Majority (90%) of respondents anticipate a recession within the next six months, responding that it was either very likely (44%) or somewhat likely (46%).

• The shape of the recession is less clear. 42% of respondents expect the recession to be short and shallow, while 25% expect it to be shallow and long, and 15% said that they don't know.

• Federal Reserve (“Fed”) interest rate increases have and are expected to continue to drive valuation adjustments across commercial real estate. 78% percent of respondents have already adjusted both cap rates and IRRs in 2022.

• A majority of respondents (85%) expect the Fed to raise rates 26-75 bps by the end of year, suggesting that cap rate and IRR adjustments are likely to continue. Over half (52%) of respondents anticipate the Fed to raise rates by another “+26 to 50 bps” by the end of the year.

Cap rates and IRRs expected to increase across property types and markets

• Over 60% of respondents reported anticipated cap rate increases across every property type (hospitality, industrial, multifamily, office, retail, self-storage, senior living, single-family rentals, student housing) and market size (major urban and secondary).

• Increasing cap rates are expected across both major and secondary markets, although

  fewer respondents anticipate cap rate increases in major markets versus smaller secondary markets. This suggests that a market size premium will continue to exist.

  On average, 9% fewer respondents anticipate cap rate increases in major markets than in secondary markets.

• Expected cap rate increases are in the range of +26-75 bps over the next six months  

  across property and market types, with the exception of office, which respondents anticipate will need a significantly larger adjustment.

• Aggregate responses showed elevated levels of cap rate uncertainty in hospitality and senior living, where more than one-fifth of the respondents selected “I don’t know.”

• Expected cap rate moves combined with anticipated Fed interest rate adjustments over the next 6-12 months suggest that respondents are expecting benign cap rate spread reaction to increased interest rates. On average, respondents expect the Fed to raise rates 47 bps by the end of 2022 and cap rates in major and secondary markets to increase by 52 bps and 68 bps, respectively.

• IRR expectations generally track with cap rate expectations, increasing moderately over the next six months. A majority of respondents expect IRRs to move up +26-75 bps across most property types and markets. Again, office was the outlier, with more respondents expecting higher adjustments. Respondents indicated a >100 bps adjustment for office in both major (29%) and secondary (41%) markets.

• Even though expected IRR changes show similarities with the responses for cap rates (specifically for property types and markets), the responses for IRRs suggest more uncertainty. Hospitality, self-storage, senior living and student housing all had high levels of “I don’t know” responses.

Download the results from the Q4 2022 survey on the impact of rising interest rates on CRE in the US