The Federal Reserve's plan to slowly raise interest rates in 2017 could have the unintended effect of driving up property and casualty claims and insurance costs for middle market commercial real estate investors and owners.
The Fed's decision on rates reflects a positive view that the U.S. economy is recovering and no longer needs to be supported by artificially low rates. For the real estate industry, however, there's another side to this issue: Critically needed capital expenditures such as upgrades to heating and air conditioning systems, roofing, flooring, as well as major electrical and plumbing work could be tabled as real estate companies seek to trim costs and save money in an environment that makes borrowing more expensive.
Over the next five to 10 years, the pressure for real estate firms to meet cash-flow projections will result in further capital expenditure reductions and increased insurance premiums, eventually impacting net incomes and long-term valuations as I wrote in a recent whitepaper titled, “Interest Rates, Capex, and the Inevitable Real Estate Conundrum.”
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