Interest Rate Trends

Multiple Forces Drive Rates Higher, Creating Challenges and Opportunities

• August payroll growth exceeded expectations with the addition of 162,000 jobs, though large revisions to recent employment reports have reduced the reliability of initial monthly estimates.
• July payrolls were revised from a loss of 23,000 jobs to a gain of 21,000, illustrating the volatility of preliminary data.
• Despite uncertainty surrounding the labor market, stronger employment conditions provide the Federal Reserve greater flexibility to raise interest rates.
• Inflation risks remain elevated as higher energy prices and new tariffs add upward pressure to consumer costs. Higher financing costs are creating pressure on transaction activity across property sectors.
• The combination of resilient employment and persistent inflation has increased expectations for additional tightening.
• As a result, rising expectations for future rate hikes have contributed to the anticipation of higher interest rates generally.

• U.S. Treasury borrowing needs remain substantial as deficit financing and debt refinancing requirements drive record levels of debt issuance
• Traditional sovereign buyers have reduced their participation in the Treasury market, shifting a greater share of debt absorption to private investors.
• Higher Treasury yields are being used to attract domestic and international private capital.
• Borrowing costs are rising globally, with sovereign bond yields increasing across Europe, the United Kingdom, and Japan.
• The potential for tighter monetary policy, elevated Treasury issuance, and rising global yields is contributing to a structurally higher interest rate environment. 

• Conventional commercial real estate borrowing costs have risen into the 6-to-7 percent range, increasing financing costs for investors.
• Higher debt costs continue to pressure underwriting assumptions and widen the pricing gap between buyers and sellers.
• Despite higher rates, lender liquidity remains relatively strong, with multiple debt providers actively pursuing new originations.
• Elevated financing costs, higher construction expenses, tariffs, and labor shortages are making new development projects increasingly difficult to justify.
• As a result, commercial real estate deliveries are slowing across many property sectors.
• Demand remains positive across many markets, and constrained supply could tighten vacancy rates and support the next cycle of rent growth. 
• While higher interest rates may continue to weigh on asset values, improving property fundamentals and future rent growth could create attractive opportunities for long-term investors.