But where does the uncertainty leave commercial real estate investors? With the 10-year Treasury yield in the mid-3% range, which is higher than it has been since the first few 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 priced over SOFR and are still quite low, but floating rates are now expected to match or surpass these fixed rates by the end of July.

The best pricing comes from lenders not dependent on the capital markets — meaning pension funds, insurance companies and banks. The worst pricing comes from conduits, whose pricing is wholly related to how they can sell their underlying bonds (commercial mortgage-backed securities or CMBS). Since those bonds are extremely volatile right now, pricing is wide and will probably stay that way for a while.

As a result of the dislocation in the capital markets, loan volume for the conduit lenders is down about 26% year to date compared to last year, according to Commercial Mortgage Alert, an industry publication.

The generally high rates and volatility in the capital markets are making new investments more challenging, but for owners of hotels, industrial properties and apartment buildings that are locked into long-term rates, these inflationary times are just fine. That is because rents at apartments and industrial properties and room rates at hotels are rising rapidly.

Not surprisingly, property pricing has continued to rise with rents. While the anticipated slowdown from rising interest rates isn’t reflected in the latest data, according to an MSCI index, which tracks commercial property prices all across the country, pricing rose 17.9% in April (year over year) for all property types. Industrial property prices rose fastest at a pace of 26%, and apartments weren’t far behind with prices increasing 23%. Retail property prices are also climbing and rose 18.4%, according to the index.

Meanwhile, anyone who has stayed in a hotel recently realizes room rates have been rising faster than inflation. A recent interview with Marriott’s CEO revealed that the hotel operator found Memorial Day weekend RevPar (Revenue Per Available Room) in 2022 exceeded the same long weekend in 2019 by 25% across Marriott brands. 

Apartment List recently reported apartment rents across the country grew 15.3% year over year in May, which is not quite as fast as the 17.5% growth reported in 2021, but still a crazy inflationary pace. Rents in the 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 a lot of factors to consider. For now, most investors are still banking on rental growth continuing to outpace inflation.