Developer Looks To Add 40 Apartments On Top Of Harvard Square Retail Property

Those under the age of about 36 or 37 probably haven’t worked in real estate at a time when interest rates were higher than 1% in the UK, or maybe 3% in the U.S. Now they may be in for a shock.

Since 2008, when central banks in the U.S. and UK dropped interest rates to near zero to boost the economy, rates have been below real estate yields (cap rates for U.S. readers). Investors paid a lot less in interest rates than they took in from rent and could sweep the difference off the table. That gap between rates and yields drew ever more investors to the sector, driving prices up. 

But in the past week, both the Federal Reserve and the Bank of England have hiked rates, by 0.5% and 0.25% respectively, to combat inflation that is rising fast and hitting highs not seen for more than 25 years. Rates are still below property yields, but both central banks have said there are more rises to come — and that cosy cushion is being eroded quickly. 

So how is it possible to make money in real estate investment when that arbitrage is no longer so pronounced and rates are rising to combat inflation? Bisnow spoke to industry veterans who have worked in more than one period of high rates, usually caused by high inflation, to gather insight into how to invest in an environment that is less than benign for property.

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A magnitudinous confluence of the corporate return-to-work push, supply chain issues that appear to be worsening, rising interest rates and the realization that office space needs to be recently built or updated to be competitive is fueling a historic surge in renovations.

In recent months, for the first time ever, architectural firms are making more income from renovation work than new construction, said American Institute of Architects Chief Economist Kermit Baker, who expects the run on retrofitting to be more than a late pandemic blip. 

It is being driven in part by an “onslaught” of building renovations happening right now, according to CBRE Global Head of Occupier Thought Leadership Julie Whelan. Landlords, in a moment of record-high vacancy and looking to differentiate their properties for future tenants, are spending vast sums on major upgrades.

Sage Realty, which just announced a $53M upgrade of 767 Third Avenue, its Class-A office tower near Grand Central Terminal in Manhattan, went for a “wholesale demo,” said CEO Jonathan Iger, including a new lobby space and a reworked amenities program for tenants, including a library, terrace garden, cafés and…

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