By Mark Mascia
Real estate is historically one of the first investments impacted when interest rates rise, and with the United States economy growing by the quarter, now is the time to assess and evaluate your investments.
As part of our continual search for undervalued real estate investments, Mascia Development LLC recently conducted a national assessment of U.S. cities to determine which commercial properties will be best positioned to withstand rising interest rates.
Our research assessed commercial property values and prospects in all 50-states, looking for cities with the most opportunities for long-term, stable growth. Our valuation criteria assessed multiple factors, including diversity and strength of employer base, 12-year population growth trends and current cash returns on real estate.
Our analysts discovered smaller cities have had the most opportunities for growth when interest rates have risen, while larger international cities have experienced the brunt of the interest rate hike.
Most investors wrongly believe that larger, international cities are a safer bet for real estate investments since they are in more demand, but our analysis shows the opposite is true.
Typically as the economy slows, commercial rents drop. Smaller cities are more insulated in this environment than larger cities. For example, a rise in cap rates from four percent to six percent would ignite a 33 percent loss in value for investors in larger international cities. For investors to just break even, rents in these cities would need to growth by 50 percent which is an unrealistic expectation in any rising interest rate environment.
On the contrary, a similar cap rate increase in smaller cities would ignite only a 20 percent drop in property values. Keep these trends in mind as you consider new real estate investments in this new expanding U.S. economy.
Mark A. Mascia is the President and CEO of Mascia Development, LLC (www.masciadev.com). He was formerly Vice President at SHVO Development, LLC. He is a licensed real estate broker. Mascia has a portfolio value of over $1.1 billion.