2 — September 2024 — M id A tlantic Real Estate Journal
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M id A tlantic Real Estate Journal
M id A tlantic R eal E state J ournal Publisher, Conference Producer ..............Linda Christman VP, Conference Producer .............................Lea Christman Editor/Graphic Artist ......................................Karen Vachon Contributing Columnists ...............Lucern Capital Partners Mid Atlantic R eal E state J ournal ~ Published Monthly Periodicals postage paid at Hingham, Massachusetts and additional mailing offices Postmaster send address change to: Mid Atlantic Real Estate Journal 117 HMS Halsted Dr., Hingham, MA 02043 USPS #22-358 | Vol. 36, Issue 9 Subscription rates: 1 year $99.00, 2 years $148.50, 3 years $247.50 & $4.00 single issue - plus postage REPORT AN ERROR IMMEDIATELY MARE Journal will not be responsible for more than one incorrect insertion Phone: 781-740-2900 www.marej.com
Interest Rates vs. Cap Rates: Their Impact on Industrial Real Estate
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T
he industrial real es- tate market has seen significant growth in
recent years, driven by a num - ber of factors like onshoring, technological advancements and the consumer’s demand for immediate goods. How - ever, like all real estate sec - tors, industrial properties are subject to the influence of broader economic factors, particularly interest rates. One of the key metrics that investors and analysts use to evaluate the performance and value of industrial real estate is the capitalization rate, or cap rate. Understanding the relationship between interest rates and cap rates is crucial for investors, developers and other industry stakeholders. What Are Cap Rates? Cap rates are a fundamen - tal metric used to assess the value and potential return of commercial real estate investments. The cap rate is calculated by dividing a prop - erty’s net operating income (NOI) by its purchase price, with the result indicating the expected return on the
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investment. For example, if an industrial property gener - ates $500,000 in NOI and is valued at $10 million, the cap rate would be 5%. Cap rates are an extremely important metric as they help inves - tors determine a property’s potential cash flow and profit - ability. Higher cap rates offer better returns but also carry more risk, while a lower cap rate offers lower returns and carries less risk. The Role of Interest Rates in Real Estate There is no question that the relationship between in - terest rates and cap rates is complex, with several factors influencing how they interact. First, there is often an inverse
relationship between interest rates and valuations. When in - terest rates rise, cap rates tend to increase as well, leading to a decrease in property value. Second, the spread between interest rates and cap rates is crucial for investors. The wider the spread, the more attractive the investment, as it suggests a higher return relative to the cost of financing. Third, cap rates can reflect market sentiment. During times of eco - nomic uncertainty, investors may demand a higher cap rate to compensate for perceived higher risk even if interest rates remain stable. For industrial real estate investors, understanding the continued on page 40
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