--- title: What Is Interest Rate Risk? description: Interest rates are a key factor in determining how much you’ll pay for commercial investment properties. image: https://www.realized1031.com/hubfs/Images/photo/abstract/commercial-building-lot-IS-1166526747.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # What Is Interest Rate Risk? Posted Aug 31, 2022 ![commercial-building-lot-IS-1166526747](https://www.realized1031.com/hs-fs/hubfs/Images/photo/abstract/commercial-building-lot-IS-1166526747.jpg?width=750&height=392&name=commercial-building-lot-IS-1166526747.jpg) Interest rate risk is the risk that an investment’s value will change as interest rates change. This is of heightened concern during periods of interest rate hikes but is also vital to watch when the Fed is lowering rates. Some investment activities are closely linked to interest rate changes. One example is bond rates. A long-term bond with a fixed [interest rate](https://www.realized1031.com/glossary/interest-rate) may sell for a higher rate when savings rates are below the bond’s face value. Other instruments and securities have similar but less direct responses to changes in interest rates. Interest rates are a key factor in determining how much you’ll pay for commercial investment properties. Understanding the correlation between mortgage interest rates, cap rates, and property values can help investors make more informed decisions when buying, selling, or holding their commercial investment assets. When interest rates rise, it costs more to borrow capital, which can reduce profit. However, other factors also affect the overall performance of commercial assets. ### **How Interest Rate Risk Impacts Commercial Real Estate Investments** The value of your commercial portfolio is affected by long-term interest rates, such as the U.S. Treasury 10-year rate, which impacts cap rates used in commercial real estate valuations. Prevailing long-term rates influence cap rates when investors bid on commercial assets, and market cap rates typically have a spread versus long-term rates that reflect risk premium. As returns on bonds and mortgage-backed securities rise, investors may look for an increased rate of return on their real asset investments. This rate of return can be determined by the [capitalization rate](https://www.realized1031.com/glossary/capitalization-rate-cap-rate), or cap rate, which is the net operating income of your investment property divided by its value or price. Rising cap rates lead to lower property values, while compressing cap rates mean increased values. Cap rates typically increase as interest rates rise since there’s now additional risk to investors -- the value of future cash flows declines, which also reduces the value of investment properties. However, the relationship here isn’t so simple. Other factors, such as solid net operating income (NOI) growth, can act as a buffer between rising interest rates and declining property values. The greater the NOI growth, the stronger this buffer becomes. Timing also is an important consideration. Short-term increases in cap rates are more quickly noticeable in your investment property’s valuation; however, the performance of any given asset is often less sensitive to cap rate fluctuations over the long term. ### **Assessing Interest Rate Risk** Fixed-income assets such as commercial real estate offer portfolio diversification, as well as the potential for capital appreciation and robust income. Assessing interest rate risk, as well as commercial assets by grade and location, can help investors identify a property’s strengths, weaknesses, and mitigate the impacts of fluctuating interest rates. Managing interest rate risk can be difficult. However, investors who perform rigorous due diligence, weigh the many variables that determine interest rates, and borrow responsibly are typically better insulated from the risk of rising interest rates. ### **Factors That Drive Interest Rates** How can we forecast the direction of interest rates? The [inflation](https://www.realized1031.com/glossary/inflation) rate plays a significant role in the health of the U.S. economy. Inflation is the rate at which prices are rising. There are measure of overall inflation, core inflation, and seasonally adjusted inflation. Rising inflation can erode consumers’ confidence in their purchasing power, as it also constrains actual purchasing strength. When the cost of goods and services increase, employers feel obligated to increase wages, contributing to the cycle of inflationary pressures. Inflation is often the prime motivator for the Federal Reserve to raise the benchmark federal funds interest rate, which is the amount that big banks charge each other for overnight loans. The Fed takes this action to “cool off the economy” by reducing the demand for credit and therefore the supply of money circulating.   Increased demand for U.S. Treasury bonds also can bump interest rates, as can moves by the Fed to suppress interest rates by buying bonds to inject capital into the economy.   This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Discover Ways To Help Manage Risk In Your Investment Portfolio [![Discover Ways To Help Manage Risk In Your Investment Portfolio](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/IPWM-Risk-ebook-250.png?width=250&height=250&name=IPWM-Risk-ebook-250.png "Learn more about how to ...") ](https://www.realized1031.com/blog/what-is-interest-rate-risk#blogform) Download eBook ---   --- ### Discover Ways To Help Manage Risk In Your Investment Portfolio ![Discover Ways To Help Manage Risk In Your Investment Portfolio](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/IPWM-Risk-ebook-550.jpg?width=550&height=650&name=IPWM-Risk-ebook-550.jpg) Learn more about how to incorporate real estate investments into your risk management strategy By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received. Search ### [Why Realized](https://www.realized1031.com/why-realized) - [Wealth Management](https://www.realized1031.com/the-wealth-management-gap) - [Why Realized](https://www.realized1031.com/why-realized) - [Our Process](https://www.realized1031.com/how-realized-works) - [Scenarios](https://www.realized1031.com/scenarios) - [Private Client Program](https://www.realized1031.com/private-client) - [Realized Exchange Services](https://www.realized1031.com/realized-exchange-services) ### [The Company](https://www.realized1031.com/about-us) - [The Team](https://www.realized1031.com/about-us) - [FAQ](https://www.realized1031.com/frequently-asked-questions) - [Testimonials](https://www.realized1031.com/testimonials) - [Press](https://www.realized1031.com/press) - [Careers](https://www.realized1031.com/careers) ### [Partners](https://www.realized1031.com/partners) - [Financial Advisors](https://www.realized1031.com/advisor) - [Broker Dealers](https://www.realized1031.com/partners/broker-dealers) - [Real Estate Agents](https://www.realized1031.com/partners/real-estate-agents) - [Certified Public Accountants](https://www.realized1031.com/partners/certified-public-accountants) ### [Resources](https://www.realized1031.com/resources) - #### Learn - [Articles](https://www.realized1031.com/blog) - [Glossary of Terms](https://www.realized1031.com/glossary) - [Capital Gains Tax Rates](https://www.realized1031.com/capital-gains-tax-rate) - #### Watch - [Video Library](https://www.realized1031.com/videos) - [Webinar Archive](https://www.realized1031.com/webinars) - #### Read - [Delaware Statutory Trust](https://www.realized1031.com/delaware-statutory-trust) - [Tenants-In-Common](https://www.realized1031.com/tenants-in-common-tic) - [1031 Exchange](https://www.realized1031.com/1031-exchange) - [Qualified Intermediary](https://www.realized1031.com/qualified-intermediary) - [Qualified Opportunity Zones](https://www.realized1031.com/opportunity-zones) #### Realized - 500 W 13th Street Austin, TX 78701 - (877) 797-1031 ##### [Contact Us](https://www.realized1031.com/contact-us) - [![Realized on Facebook](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-facebook-whiterev.png?width=60&height=60&name=social-facebook-whiterev.png)](https://www.facebook.com/Realized/) - [![Realized on LinkedIn](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-linkedin-whiterev.png?width=60&height=60&name=social-linkedin-whiterev.png)](https://www.linkedin.com/company/realized/) - [![Realized on YouTube](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-youtube-whiterev.png?width=60&height=60&name=social-youtube-whiterev.png)](https://www.youtube.com/c/Realized1031?sub_confirmation=1) - [![Realized Holdings, Inc. BBB Business Review](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/bbb/RZH2-bbb-seal.png?width=40&height=65&name=RZH2-bbb-seal.png)](http://www.bbb.org/central-texas/business-reviews/real-estate-investors/realized-holdings-llc-in-austin-tx-1000112948/#bbbonlineclick) - [![FEA Logo](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/fea/RZH2-fea-logo.png?width=82&height=65&name=RZH2-fea-logo.png "FEA Logo")](https://www.1031.org) SECURITIES DISCLOSURE Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized Holdings”). Securities and/or Investment Advisory Services may be offered through Registered Representatives or Investment Advisor Representatives of Realized Financial, Inc. ("Realized"), a broker/dealer, member [FINRA](https://www.finra.org)/[SIPC](https://www.sipc.org/), and registered investment adviser. Realized is a subsidiary of Realized Holdings, Inc. ("Realized Holdings"). Check the background of this firm on [FINRA's BrokerCheck](https://brokercheck.finra.org/firm/summary/22333). Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested. This site is published for residents of the United States who are accredited investors only. Registered Representatives and Investment Advisor Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every representative listed. For additional information, please contact the Realized Compliance department at 512-472-7171 or info@realized1031.com. - [Terms & Conditions](https://www.realized1031.com/terms-and-conditions) - [Privacy Policy](https://www.realized1031.com/privacy-policy) - [Form CRS](https://www.realized1031.com/hubfs/common-files/disclosures/FormCRS.pdf) - [ADV 2A](https://www.realized1031.com/hubfs/common-files/disclosures/ADV2A.pdf) - [Reg BI Disclosures](https://www.realized1031.com/hubfs/common-files/disclosures/RegBI.pdf) -   © 2026 Realized Holdings, Inc. ```json { "@context" : "http://schema.org/", "@type" : "BlogPosting", "articleBody" : "Interest rate risk is the risk that an investment’s value will change as interest rates change. This is of heightened concern during periods of interest rate hikes but is also vital to watch when the Fed is lowering rates. Some investment activities are closely linked to interest rate changes. One example is bond rates. A long-term bond with a fixed interest rate may sell for a higher rate when savings rates are below the bond’s face value. Other instruments and securities have similar but less direct responses to changes in interest rates. Interest rates are a key factor in determining how much you’ll pay for commercial investment properties. Understanding the correlation between mortgage interest rates, cap rates, and property values can help investors make more informed decisions when buying, selling, or holding their commercial investment assets. When interest rates rise, it costs more to borrow capital, which can reduce profit. However, other factors also affect the overall performance of commercial assets. How Interest Rate Risk Impacts Commercial Real Estate Investments The value of your commercial portfolio is affected by long-term interest rates, such as the U.S. Treasury 10-year rate, which impacts cap rates used in commercial real estate valuations. Prevailing long-term rates influence cap rates when investors bid on commercial assets, and market cap rates typically have a spread versus long-term rates that reflect risk premium. As returns on bonds and mortgage-backed securities rise, investors may look for an increased rate of return on their real asset investments. This rate of return can be determined by the capitalization rate, or cap rate, which is the net operating income of your investment property divided by its value or price. Rising cap rates lead to lower property values, while compressing cap rates mean increased values. Cap rates typically increase as interest rates rise since there’s now additional risk to investors -- the value of future cash flows declines, which also reduces the value of investment properties. However, the relationship here isn’t so simple. Other factors, such as solid net operating income (NOI) growth, can act as a buffer between rising interest rates and declining property values. The greater the NOI growth, the stronger this buffer becomes. Timing also is an important consideration. Short-term increases in cap rates are more quickly noticeable in your investment property’s valuation; however, the performance of any given asset is often less sensitive to cap rate fluctuations over the long term. Assessing Interest Rate Risk Fixed-income assets such as commercial real estate offer portfolio diversification, as well as the potential for capital appreciation and robust income. Assessing interest rate risk, as well as commercial assets by grade and location, can help investors identify a property’s strengths, weaknesses, and mitigate the impacts of fluctuating interest rates. Managing interest rate risk can be difficult. However, investors who perform rigorous due diligence, weigh the many variables that determine interest rates, and borrow responsibly are typically better insulated from the risk of rising interest rates. Factors That Drive Interest Rates How can we forecast the direction of interest rates? The inflation rate plays a significant role in the health of the U.S. economy. Inflation is the rate at which prices are rising. There are measure of overall inflation, core inflation, and seasonally adjusted inflation. Rising inflation can erode consumers’ confidence in their purchasing power, as it also constrains actual purchasing strength. When the cost of goods and services increase, employers feel obligated to increase wages, contributing to the cycle of inflationary pressures. Inflation is often the prime motivator for the Federal Reserve to raise the benchmark federal funds interest rate, which is the amount that big banks charge each other for overnight loans. The Fed takes this action to “cool off the economy” by reducing the demand for credit and therefore the supply of money circulating. Increased demand for U.S. Treasury bonds also can bump interest rates, as can moves by the Fed to suppress interest rates by buying bonds to inject capital into the economy. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.", "articleSection" : [ "Risk" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2022-08-31T19:20:29+0000", "datePublished" : "2022-08-31T19:20:29+0000", "description" : "Interest rates are a key factor in determining how much you’ll pay for commercial investment properties.", "headline" : "What Is Interest Rate Risk?", "image" : { "@type" : "ImageObject", "height" : 563, "url" : "https://f.hubspotusercontent10.net/hubfs/733513/Images/photo/abstract/commercial-building-lot-IS-1166526747.jpg", "width" : 750 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/what-is-interest-rate-risk", "name" : "What Is Interest Rate Risk?", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "https://f.hubspotusercontent10.net/hubfs/733513/Images/photo/abstract/commercial-building-lot-IS-1166526747.jpg" } ```