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Short answer: Higher rates raise loan payments, shrink how much lenders will lend and reduce the price a buyer can pay while still meeting their return goals. Mark watches jobs reports, inflation (CPI) reports and especially the long-term Treasury bond market to judge where rates may head, because the cost of money affects nearly every deal.
Why rates matter so much #
- Loan size. Lenders size loans by debt coverage, so a higher rate means a smaller loan for the same NOI and more cash required.
- Price. When interest rates rise but sellers’ price expectations (cap rates) don’t move much, returns get squeezed, which is one reason listed facilities are often hard for smaller buyers to make work.
- Timing. A deal underwritten at today’s rate may need re-underwriting if rates rise before key steps are complete.
What Mark watches #
- Jobs reports. A weakening labor market has historically pushed the Federal Reserve toward holding or cutting rates.
- Inflation (CPI). The Fed weighs jobs data alongside inflation.
- The bond market. Mark calls it “the adult in the room.” If long-term Treasury yields don’t fall after good inflation news, the market may be pricing in other pressures, such as the amount of government borrowing ahead, that keep long-term rates elevated regardless of Fed decisions.
Mark is clear that he isn’t an economist; this is how he reads the signals for his own business planning. Specific conditions change quickly, so check current data and talk with your lender.
Related answers #
- How much money do you need to get into self-storage today, and how does debt coverage affect it?
- What is a cap rate, and why is it so often misunderstood in self-storage?
- Is self-storage oversupplied, and where is the opportunity for smaller investors?
Source: Mark’s post What the Jobs Report, CPI, and Bond Market May Be Telling Us About Interest Rates
