Capital Markets – Investing in Rising Interest Rate Environment
Published October 12, 2022
By Matt Baron
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Midway in a panel discussion at CRE.Converge. A quip about the Federal Reserve acting like a newbie teenage driver – “way to much gas, too much brake, and way too many gas” – was a hit with the crowd. But palpable nervousness tinged those chuckles at the metaphor by moderator Bart Johnson, president and CRE market head, Wintrust Bank.

Questions over the duration and extent of rising interest rates have slowed overall market activity. No one on the panel expected relief from the continuing suspense.

Peter Schultz, a veteran of the industry and executive vice president – East region, First Industrial Realty Trust, Inc., stated that rates would rise, so there will be more pressure. However, that doesn’t mean that the year is a failure. In the office sector, for example, prior market momentum resulted in a stronger first eight months than during the same period in 2021, which was a strong year, noted Al Pontius, senior vice president, national director, office and industrial divisions, Marcus & Millichap.

However, Pontius acknowledged, “The transaction that happened yesterday is no longer the relevant benchmark, because that transaction was conceived two, three, four months ago.” He also noted a “big divergence” in the investor profile currently.

“The institutional market is way more discerning, has narrowed the fairway for equity investment substantially,” Pontius said. “And the private investor has also done that but is generally much more active overall today than the institutional investor.”

Johnson asked Shahin Yazdi, principal/managing director, George Smith Partners, Inc., if cap rates would continue to go up as interest rates rise.

Focusing his answer on the multifamily market, Yazdi predicted cap rates “will continue to go up until

rates stabilize, and people get a sense the government and the Fed is done raising rates. It will take people three to four months to become comfortable with the idea.[interest]GeorgeSmith Partners managed to raise $4 billion in equity and debt placements across different asset types last year. Yazdi said that transactions have fallen through in the face of market volatility. He noted some recent deals in which buyers have sought to renegotiate terms, adding, “We’ve actually had a few borrowers willing to walk away from a transaction because It just didn’t pencil for them anymore.”

Many sectors, including the commercial mortgage-backed securities (CMBS) market, are in wait-and-see mode, panelists said, with a prevailing reluctance to commit to financing’s long-term implications until stability sets in. Pontius pointed out that “institutional capital is very selective” and wants to see how this plays out. You have a quiet audience. So, you have a pretty quiet audience.”

The private sector, meantime, is “equally educated on all these concerns, so it’s not about sophisticated or unsophisticated. This has nothing to do. Pontius said that the private sector also includes billionaire families. “The difference is in the private sector, there are other motivating factors,” such as minimizing taxation via a 1031 like-kind exchange.

Yazdi provided a forecast for more institutional equity investor activity in the first quarter of 2023: “They do have a lot of money, that money is burning a hole in their pocket. They have a fund life [cap] they need to get that capital out.”

Panelists covered ground on an array of other sectors, with Schultz returning to the topic of the office market, which he described as having “pretty good” demand.

“Rents continue to grow at a blistering pace. Schultz said that 150% of the holdover rent could lead to a lower rent in some markets. “Although the cap markets are extremely difficult at the moment, we continue see leasing holding up, and we’ll watch how long that continues.”[and]Yazdi stated that “if companies start to fail, that’s going be affecting every sector.”

“But right now, all the demand is still there, and companies are doing incredibly well if you look at the financials.”

For all of the “if this, then that” clauses littered throughout the discussion, Schultz perhaps best captured the hope that permeated the crowd attending the panel.

“Whatever the Fed does … let’s get to that point sooner than later,” said Schultz, “because I think that will start to make it a little bit easier for everyone to start making rational decisions again.” “If this is drawn out a long time, I think it creates more risk across the macro-environment.”

This post is brought to you by JLL, the social media and conference blog sponsor of NAIOP’s CRE.Converge 2022. Learn more about JLL at or

In addition to a 20-year journalism career in which his work appeared in numerous publications, including the Chicago Tribune, USA Today and Time, Matt Baron in 2005 launched Inside Edge: PR + Media. Matt was a prolific writer for more than ten years, including the Chicago chapters of Urban Land Institute and NAIOP.

coronavirus, COVID-19, CRE, CREConverge, economic growth, economic impact, economy, Federal Reserve, labor, labor shortage, post-COVID-19

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