05/11/2021 | by

The Federal Open Market Committee left interest rates unchanged at its April 27-28 policy meeting, and reaffirmed its commitment to keep rates low until the economy has recovered more fully from the pandemic. Rates are at historical lows, however, and will certainly move higher as the economy gets back to pre-pandemic levels of activity. Some observers have expressed concern about the impact of higher rates on commercial and residential real estate markets. Most of the evidence, however, suggests that the rate environment will remain favorable for real estate.

The two biggest factors for the outlook for long-term interest rates (which have the most direct impact on commercial real estate markets) are economic growth and the likelihood that such growth will lift inflation higher. Economic activity is expected to rebound over the spring and summer as the vaccine rollout helps slow the spread of COVID-19, allowing businesses and consumers to begin getting back to pre-pandemic normal. Many economists expect the economy to grow at a 6% or faster annual rate over the remainder of this year. To the extent that faster growth generates higher inflation, it also generates higher business activity and demand for commercial space, higher occupancy rates, higher earnings for commercial real estate, and higher property valuations. These higher earnings generally offset any drag from rising interest rates during periods when growth accelerates.

Inflation is indeed likely to move higher as growth accelerates. Concerns about inflation risks first began to surface as Congress debated the $1.9 trillion fiscal stimulus package in February. Former Treasury Secretary Lawrence Summers warned that the magnitude of this stimulus could push the economy beyond its potential, fueling inflation pressures.

Last week, Treasury Secretary Janet Yellen made headlines with comments made regarding interest rates. By May 4, according to an article in the Wall Street Journal, Yellen, a former Fed chairwoman, said, “I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it.”

The yield on the 10-year Treasury note rose from just above 1% in late January to 1.75% at the end of March.

Commercial real estate is likely to be resilient, however, for a whole host of reasons, including macroeconomic factors, economic policies, and financial conditions within commercial real estate markets.

A version of this article originally appeared on Forbes.com.

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