Interest rate moves are the kind of macro event that feel abstract until they show up in your bank account or property valuation reports. Over the last decade I’ve watched several rate cycles and advised investors on how to adapt underwriting, debt management, and asset-level operations. In this piece I want to walk you through precisely when rising rates really bite commercial real estate (CRE) values, what drives the timing and magnitude of that bite, and which property types typically withstand the pressure better.
Why rates matter for commercial real estate — the mechanics
At a high level, two channels connect interest rates and CRE prices:
- Cost of capital: Higher interest rates increase borrowing costs. For most CRE buyers that means lower leverage or higher debt service, cutting into cash flow and reducing what a buyer will pay today.
- Discount rate and cap rates: Valuations are sensitive to the discount rate investors apply to future cash flows. When risk-free rates rise, the required return on real estate typically rises too — which shows up as higher cap rates and lower prices when applying the income approach.
But those mechanics don’t operate instantly. Timing depends on debt maturity, lease structures, and market sentiment. That’s why an initial hike from a central bank doesn’t automatically translate into a 10% haircut across CRE; the hit comes later and is concentrated in certain asset types.
When rising rates actually hit property values
There are three common moments when rates pressure values:
- At refinancing: This is the most acute and predictable channel. Properties financed with floating-rate debt or short-term fixed loans face immediate higher payments when rates rise. The impact is greatest when borrowers have tight cash flow margins or minimal reserves.
- When cap rates reprice: Cap rate expansion happens gradually as buyers demand higher yields. That process accelerates when market transactions show higher cap rates, or when financing becomes tougher and fewer buyers are willing to use leverage. Cap rate moves can lag rate hikes by several quarters.
- When cash flows weaken: If higher rates trigger a broader economic slowdown, vacancy and rent growth can deteriorate, reducing Net Operating Income (NOI). That second-order effect can deepen price declines because lower NOI combined with higher cap rates multiplies downward pressure on value.
In practice, the fastest price declines show up in assets where refinancing is imminent and leverage is high. If a property refinances during a steep rate climb, the valuation impact can be immediate and large. A useful rule of thumb: every 100 basis point move in cap rates reduces value by roughly 9–10% for a property with a 6% initial cap rate (because Value = NOI / Cap Rate).
Which property types are most vulnerable
Not all commercial real estate reacts the same way. Here are the categories I watch closely when rates rise:
- Most vulnerable — Office (especially suburban and secondary): Office fundamentals are fragile in many markets after pandemic-era shifts. High vacancy, long lease-up periods, and tenant concessions mean NOI can fall quickly. Offices also often have large loan balances tied to maturing loans, so the refinancing channel is significant.
- Vulnerable — Retail (secondary malls and discretionary-driven centers): Retail with exposure to discretionary spending or anchor tenant risk faces both cash-flow and re-leasing risks. Higher rates can accelerate tenant bankruptcies and reduce buyer appetite, widening cap rate spreads.
- Mixed resilience — Multifamily: Traditionally a rate-sensitive sector, multifamily often resists moderate rate shocks because of steady housing demand and shorter lease terms that allow faster rent resets. But heavily levered properties in markets with oversupply can see steep hits at refinancing.
- Resilient — Industrial and logistics: Industrial real estate has been a strong performer thanks to e-commerce-driven demand. These properties usually have strong rental growth, low vacancy, and investor competition that helps cap rates stay compressed longer, making them more resistant to rate-driven repricing.
- Resilient — Niche essentials (medical office, cold storage, life sciences): Properties tied to essential services or specialized needs tend to have more stable cash flows and longer-term leases with credible tenants, which reduce refinancing and cash-flow risks.
Which property types survive — characteristics of survivors
In my experience, properties that “survive” rate shocks share several characteristics:
- Strong, growing NOI: Rent growth that outpaces inflation provides a cushion for higher debt service or cap rates.
- Low re-leasing risk: Long-term leases with creditworthy tenants reduce vacancy exposure during economic slowdowns.
- Low leverage or extended debt maturities: Owners who locked in long-term fixed-rate financing or maintain modest debt-to-value ratios don’t face refinancing cliffs.
- Operational optionality: Ability to cut costs, repurpose space, or upsell tenants (e.g., adding logistics services or amenity upgrades) helps preserve cash flows.
- Investor demand and liquidity: Sectors that attract institutional capital (like core industrial) can see milder cap rate expansion because buyers with low return hurdles keep bidding.
Practical steps I recommend to investors right now
If you own CRE or plan to buy, here are pragmatic actions I use in my advisory work:
- Stress test refinancing scenarios: Model debt service at several interest rate levels and at lower NOI. Assume higher cap rates and calculate price sensitivity. If a 200 bp increase in debt cost wipes out your equity, change course.
- Prioritize lease terms: Target assets with longer leases and creditworthy tenants. A two-year rent reset is riskier than a ten-year NNN lease with a corporate tenant.
- Lock long-term fixed financing when it’s attractive: If you can secure a 5–10 year fixed rate, you buy time. I evaluate lender covenants and prepayment terms carefully — cheaper, flexible financing is better than the absolute lowest rate if it exposes you at maturity.
- Diversify within real estate: Consider allocating across sectors (industrial, multifamily, medical) rather than concentrating in cyclical offices or discretionary retail.
- Keep liquidity cushions: Maintain operating reserves equal to several months of debt service. In a rising rate environment, cash is an option value — it lets you hold through downturns or buy assets at discount.
- Watch market comps closely: Transaction evidence drives cap rate repricing. Use sales data platforms like CoStar, MSCI, or CBRE reports to track actual cap rate movements in your submarket.
How to think about opportunity — where to look when prices adjust
Price dislocations create opportunities, but only for investors who understand the income and financing profile. When rates push prices down:
- Look for high-quality assets with temporary NOI issues (supply-driven vacancy, tenant turnover) where operational fixes can restore cash flow.
- Consider sector rotation: some capital seeks defensive assets (multifamily, medical), creating pockets of mispricing in cyclical sectors.
- Private lenders and structured credit players often step in offering creative financing; these can be useful but come with higher cost and more covenants — understand exit paths thoroughly.
Rising rates are an inevitable part of the cycle; the key for investors is knowing which channel will hit your assets, when it will happen, and whether your balance sheet and operations are positioned to absorb the impact. I rely on scenario analysis, conservative underwriting, and a focus on cash-flow resiliency — and those same principles help readers navigate the next phase of the rate cycle.
