How does interest rates affect CRE valuations?

[Michael Kim]

I have read that in an environment of rising rates, this would negatively impact CRE valuation. Can someone walk me through this? Also I would love to hear peoples opinions on this.

[Robert C.]

@Michael Kim, That's true in the context of all else staying the same. So, higher interest rates means higher borrowing costs, which means investors purchasing properties for less money in order to get higher income to cover those costs. 

But, if inflation outpaces rising rates or demand continues to outstrip supply, then valuations would not necessarily drop if you see increased rents that continue to pay for the increased costs of borrowing.

Of course, while inflation may save you from seeing lower valuations, the purchasing power of all our money has gone down, but you will still be doing better than someone who didn't participate in inflated earnings.