Urban Land - Global bond markets are undergoing a sharp repricing as persistent inflation, rising government debt, and shifting expectations for monetary policy push borrowing costs higher across major economies. The selloff has raised a larger question for real estate—whether today’s higher cost of capital represents another cyclical adjustment or a more lasting shift in the investment landscape.
Urban Land: Given what’s happening in global bond markets, what is your outlook for interest rates and the cost of capital over the longer term, and how is that outlook shaping your real estate investment, lending, or development decisions today?
Michael Ritz, Executive Vice President, Investments, Peachtree Group:
Real estate, like every other sector, goes through cycles. But outside of a black swan event, we are not going back to the interest rate environment we had before 2022. That was an extraordinary period of cheap capital, not something we should view as normal.
The question is not whether rates move up or down 50 or 100 basis points from here. Over the longer term, we have to be prepared for a higher cost of capital. The Fed can influence short-term rates, but the bond market ultimately sets the price of long-term capital. Persistent inflation, government borrowing, and the amount of debt that needs to be financed are all putting pressure on long-term rates.
That changes how you have to approach real estate. We are underwriting to today’s cost of capital and pricing in a cushion for an extended period of elevated bond yields, not hoping lower rates make a deal work. On the lending side, that means greater attention to basis, structure, sponsorship, and downside protection. On the investment and development side, it means being more disciplined about where we deploy capital and what assumptions must hold to generate an attractive return.
But that environment is also creating significant opportunity. Property fundamentals can remain healthy even as higher rates put pressure on valuations, refinancing, and existing capital structures. A lot of real estate was financed when the risk-free rate was close to zero. As that debt matures into a very different rate environment, the stress is often not at the asset level; it is in the capital structure.
You can have a good asset with strong underlying demand and cash flow that simply cannot support the same amount of debt at today’s cost of capital. That dislocation will be with us for some time, and we think it will create opportunities across both lending and investing. We are not building our strategy around a rate forecast. We are building it around the assumption that capital has to work at today’s price. If rates eventually provide a tailwind, that is upside, not the investment thesis.
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