But where is the uncertainty for commercial real estate investors? With the 10-year Treasury yield hovering in the mid-3% range, higher than in the early months of 2011, borrowers are choking on commercial mortgage rates.

According to the John B. Levy Commercial Mortgage Survey, 5- and 10-year mortgage rates are now in the 4.80% to 5.25% range. Floating rate loans are above SOFR and are still quite low, but floating rates are expected to meet or exceed these fixed rates by the end of July.

You get the best pricing from lenders who are independent of the capital market – i.e. pension funds, insurance companies and banks. The worst prices come from conduits, whose prices depend entirely on how they can sell their underlying bonds (Commercial Mortgage Backed Securities, or CMBS). Because these bonds are extremely volatile right now, pricing is broad and likely to remain so for a while.

As a result of the turmoil in capital markets, lending to conduit lenders is down about 26% year-to-date year-to-date, according to Commercial Mortgage Alert, an industry publication.

Generally high interest rates and volatility in capital markets are making new investments more difficult, but for hotel, industrial property and apartment building owners tied to long-term interest rates, these inflationary times are okay. Because rents in apartments and commercial properties as well as room prices in hotels are increasing rapidly.

Unsurprisingly, house prices have continued to rise with rents. While the expected slowdown from rising interest rates isn’t reflected in the latest data, prices rose 17.9% (yoy) for all property types in April, according to an MSCI index that tracks commercial property prices across the country. Commercial property prices rose the fastest, at a pace of 26%, and apartments were not far behind, with prices rising 23%. Retail property prices are also rising, up 18.4%, according to the index.

By now, anyone who has stayed in a hotel recently will find that room rates have risen faster than inflation. A recent interview with Marriott’s CEO revealed that the hotel operator found that Memorial Day weekend RevPar (revenue per available room) in 2022 exceeded the same long weekend in 2019 by 25% across all Marriott brands.

Apartment List recently reported that apartment rents across the country rose 15.3% year-on-year in May, which isn’t quite as fast as the 17.5% reported in 2021 but still a crazy pace of inflation . Rents in Richmond MSA grew more modestly at 12.9% year over year, but May rental growth ranks the city as the 18th fastest growing rental market in the country.

While real estate is generally considered a decent hedge against inflation, there are many factors to consider. Currently, most investors are still betting on rental growth that will outpace inflation.