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The impact of rising interest rates on commercial real estate
The rising interest rate environment raises concern about the potential impact on US commercial real estate property values and investment performance. This is causing real estate investors to fear that rising interest rates will cause capitalization rates to rise and property values to fall, resulting in weaker total returns. Historical data show that higher interest rates do not necessarily result in lower property values and total returns. A number of factors may help to protect overall real estate performance, including capitalization rate spreads over the US 10-year Treasury yield, and the outlook for economic growth and real estate market fundamentals.
"Interest rates and capitalization rates are believed to move in lockstep, with higher interest rates quickly translating into higher capitalization rates and lower property values. However, that is not necessarily the case. If interest rates are rising because of stronger economic growth, as is currently the case, real estate demand will also likely be growing. If interest rates are increasing gradually, and are likely to remain at, or below, long-term averages, as is currently expected, real estate would likely be well positioned to benefit in such an environment."
- Melissa Reagen, Head of Research, Americas