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Featured Article
Few topics create more anxiety in commercial real estate than interest rates. Every rate hike seems to trigger the same question from investors:
“Should I wait to buy STNL until rates come down?”
While interest rates absolutely influence pricing, they are rarely the deciding factor in whether an STNL investment succeeds or fails. In fact, many investors misunderstand how rates actually impact value—and overlook the variables that matter far more.
Here’s a clearer way to think about interest rates in STNL investing.
Interest Rates Affect Pricing—Not Fundamentals
Rising rates primarily impact:
Buyer leverage
Cost of capital
Required returns
Short-term pricing expectations
What they do not change:
Tenant operations
Lease obligations
Rent collections
Location quality
Long-term demand for passive income
Strong STNL assets don’t become bad investments because rates move. They simply reprice to reflect the cost of capital at that moment in time.
Why Cap Rates Don’t Move One-for-One With Rates
A common misconception is that cap rates must rise at the same pace as interest rates.
In reality, STNL cap rates are driven by:
Tenant credit
Lease term
Lease structure
Location quality
Buyer demand for passive income
This is why we often see:
Minimal cap rate movement on long-term, corporate-backed leases
Wider cap rate expansion on weaker credit or short remaining term
Strong pricing resilience for essential-use properties
In short, capital chases safety, especially during uncertain rate environments.
The Yield Spread Matters More Than the Headline Rate
Sophisticated investors focus less on absolute interest rates and more on the spread between cap rates and borrowing costs.
When spreads compress:
Buyers become cautious
Leverage is used more conservatively
Pricing pressure increases
When spreads widen:
Buyers regain confidence
Cash buyers gain advantage
Long-term investors step in
This is why higher-rate environments often create better entry points for disciplined buyers—particularly those with longer hold horizons.
Lease Term Becomes More Important as Rates Rise
As rates increase, investors place a premium on income certainty.
Longer lease terms:
Reduce refinance risk
Improve lender confidence
Support valuation stability
Protect exit liquidity
Shorter-term leases feel far riskier in volatile capital markets, even if the tenant is strong.
This is why two identical properties can trade at very different cap rates based solely on remaining lease term.
Location and Credit Still Trump Rates
In every rate cycle, the same assets outperform:
Strong locations
Essential businesses
High-credit tenants
Well-structured NNN or absolute NNN leases
These deals maintain liquidity even when:
Debt markets tighten
Buyers become selective
Transaction volume slows
Rates move. Quality endures.
What Smart Investors Do Instead of Timing Rates
Rather than waiting on the Fed, experienced STNL investors focus on:
Buying assets they can hold through cycles
Stress-testing renewal and re-tenanting scenarios
Prioritizing downside protection over peak pricing
Structuring deals with conservative leverage
Taking advantage of motivated sellers when uncertainty rises
Trying to time interest rates is speculative. Buying durable real estate with durable income is strategic.
Final Thought
Interest rates influence when deals trade—but fundamentals determine how they perform.
If you’re underwriting an STNL opportunity today, the most important questions are not:
“Where are rates going next?”
but:“How strong is the tenant?”
“How resilient is the location?”
“What happens when the lease shortens?”
If you want help evaluating how interest rates truly impact a specific STNL deal—or how to position your portfolio in this environment—reply to this email. I’m happy to walk through the analysis with you.
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