Bailey Routzong

What does “Rising Interest Rates” mean for your Real Estate values?

We have been waiting to complete this issue until the Federal Reserve officially announced its scope of interest rate increases for 2022… the news is in. In its March meeting the Federal Reserve announced a ¼ percent increase in the baseline rate, with up to 6 more increases scheduled during 2022. Subsequently the Federal Reserve chairman has gone even further, indicating more aggressive increases of ½ percent versus the initial ¼ percent increase in an effort to tamp down inflation.

How do these increased interest rates impact your real estate value?

  • Your school real estate asset is a commercial income producing property, and therefore its value is based on current marketplace yield requirements.
  • That value fluctuates with the marketplace of investor yields (sorry, that 18-month-old appraisal doesn’t indicate today’s value unless the marketplace investor yield is the same today as it was 18 months ago).
  • The formula for value is the amount of annual income (in the form of rent) the property produces, divided by the marketplace investor yield requirement, thus providing the indicated property value.

For clarification here are some examples

For illustration purposes, we will use numbers typical of the current marketplace.

The property value moves inversely to changes in the marketplace investor yield which is illustrated below:

To Summarize

Based on our conversations with various readers/clients across the country, many school owners are exiting at this time. Why? These owners recognize that in the total value of their business and real estate, some 70% lies in the real estate. Therefore, any change in the financial markets that negatively impacts the largest component of their total assets’ value is a serious threat to their intended future income stream.

Bailey Routzong can advise you on the scale of how these financial market changes will impact your asset values and how we can minimize potential loss in values.

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