I don't usually take a firm position on rates. This September I did. Here are the signals, what I found in the 1970s, and the acquisition strategy I think fits.
I normally don't take or announce firm positions when it comes to rates. But this September there are too many signals, and I now firmly believe we are heading into a higher-rate cycle for some time. Several years at least.
I hope I am wrong. If rates drop, everyone in commercial real estate wins and we get Disneyland times again, like we had during COVID.
But if they keep rising, my acquisition strategy has to be built for it.
One, the Fed is hiking. In September 2026 it raised rates for the first time since 2023, and 16 of its 18 officials expect at least one more hike before year-end. That thinking among them will stay for quite some time.
Two, about a third of the federal debt comes due within twelve months. Much of it was borrowed when money was nearly free. It gets refinanced at today's rates, and that pushes Treasury yields up.
Three, the Fed does not control the rates we borrow at. The Fed rate and Treasuries do not correlate as much as many would think. For example, the Fed started cutting in 2024 and the 10-year went up anyway.
History does not repeat, but it rhymes. We have seen this movie, in the 1970s. I was not in the business then, so I spent a few hours researching and reading about it. Rates stayed too low for too long, inflation got out of hand, and it took more than a decade to get it back in the cage.
The traditional strategy gets shaky when debt rates rise, cap rates decompress and values drop. That's the one where you buy value-add, fill the vacancy, refinance, and live on the cash flow spread between cap rate and debt.
Here is what surprised me. From 1978 to 1981, with the Fed's rate near 19%, institutional commercial real estate returned 16% to 21% a year and stayed ahead of inflation. Inflation pushed rents up faster than expanding cap rates pulled values down.
Here is the quick math on a property whose cap rate goes from 7% to 8%:
So it becomes a game of how fast you can raise NOI. Stress the deal on 100 basis points of cap decompression, and check whether the rents expiring that year get to market enough to hold or increase the value.
What to avoid: low cap rates with long flat leases, floating-rate debt, and big tenant improvement and commission bills.
Buy higher caps, short leases, long debt at low leverage. That's what did well for CRE folks the last time we saw this movie.
That's my hunch. Which camp are you in? Are rising rates short-lived, or are we here for years to come? And are you buying, pausing to get clarity, or adjusting the strategy?
