Stagflation is likely to lead to lower US commercial real estate (CRE) valuations, Fitch Ratings says in new analysis of factors that could affect CRE prices. Inflation and weak economic growth could result in modestly growing or declining nominal net operating income (NOI) from soft tenant demand and elevated capitalization (cap) rates reflecting a higher risk premium.

Changes in nominal CRE values are typically accompanied by similar directional movements in NOI, and values increase in most sustained rising interest rate periods. During these periods of rising long-term interest rates, property-level cash flows tend to keep pace with, or grow faster than, the increase in cap rates tracked by the American Council of Life Insurers. However, stagflation could result in a prolonged period of elevated cap rates, which would likely result in declines in CRE values.