Courtesy of The Real Deal:
“Jonathan Gray thinks people are getting too worked up about interest rates.
“There’s a (false) sense that owning real estate is the same as owning a bond,” Blackstone Group’s real estate head said in an interview on CNBC Tuesday. “Real estate, like stocks, can see earnings growth. And that’s what we’re seeing today because of favorable fundamentals.”
As the Federal Reserve readies itself to raise short-term rates later this year, many in the real estate industry worry that higher short-term rates could spill over into higher long-term rates, which could increase the cost of financing and put downward pressure on property prices.
But Gray argued that rising rates don’t have to be bad for the real estate market since they tend to coincide with improving fundamentals – such as employment and income. He pointed out that the real estate market “did OK” in previous eras of rising rates.
“We don’t expect to see the growth in value in the next couple years that we’ve seen in the last four or five years,” he admitted. “But we don’t expect to see some sort of sharp decline in the near term.””
It’s worth paying attention to the guys at Blackstone, as they are the biggest of the big in institutional real estate. And his logic about real estate having an ability to increase rents does distinguish it from bonds. BUT…we are dealing in unchartered territory when it comes to central bank policy, and part of what has driven recent pricing in real estate is the interest rate environment that we live in. As such, many folks have increased their allocation to the space because of its financialization and as an expression of an alternative to traditional fixed income. So, Gray may be right, but there is a lot more going on that muddies the waters in terms of what comes next.
