Implications of Rising Interest Rates on CRE Recovery

January 3rd, 2011

Implications of Rising Interest Rates on CRE Recovery

As published by Cassidy Turley Commercial Real Estate Services, December 2010.

What is Driving Interest Rates Up?

The dynamics that are driving rising interest rates in the U.S. can, in most instances, be reduced to a “glass is half-full/half-empty” argument. For pessimists, rising interest rates are a function of the newly elevated risks associated with U.S. long-term debt (e.g., extending the Bush-era tax cuts will add an estimated $800 billion to public debt and plans remain murky as to how America will address its fiscal problems). For optimists, a rise in interest rates is simply a manifestation of the economic recovery (e.g., improved demand pushes up inflation expectations which in turn pushes interest rates upwards). Although Cassidy Turley acknowledges the risks to the still-fragile economic recovery – with particular emphasis on a possible spillover from the European debt crisis – our baseline forecast assumes the recent rise in interest rates is being driven primarily by an accelerating economy. Moreover, if history is any guide, more often than not a rise in interest rates is a harbinger of a strengthening economy. This was the case following nearly every recession Post WWII (see chart below).

The above is an excerpt from a December 2010 white paper. To view the entire piece on the Cassidy Turley website please click here http://cassidyturley.com/research/insights-and-white-papers.