Federal interest rates remain at a 22-year high with no signs of retreating. Here’s the “good”, the “bad” and the (potentially) “ugly” when it comes to cell site leases.
The Good: Site owners have more options
For years, low interest rates helped drive up cell site lease values. Even for site owners who were interested in alternatives, there were fewer attractive places to re-deploy the proceeds as traditional real estate appeared even richer than cellular infrastructure, equities were trading at a premium and fixed income rates offered minimal value returns.
Fast forward to today, the landscape has shifted substantially:
- Over the last 18 months, persistently higher interest rates have eroded values of many real estate categories by 20-30%, with potentially further downside in store for office, retail and multifamily.
- Conservative fixed-income yields are delivering returns in the high single digits, with short-term, risk-free rates above 5% (twice the average annual cell site lease increase!).
- Fortunately, at least for the time being, cell site leases have only experienced a modest dip of roughly 10% from peak values reached in late 2021 and early 2022.
In turn, we have a particularly attractive market for those considering 1031 exchanges into multi-family, retail, and select office assets. And, for site owners looking to de-risk, they can now park proceeds into tax-efficient, highly liquid guaranteed US Treasuries at a very attractive rate of return.
The Bad: While cell site lease values have proven resilient, they’re not immune to higher rates indefinitely
Today, cell site lease prices are near historic peaks, demand from buyers remains strong and terms stand favorable to sellers. However, the major mobile network operators and publicly traded tower companies have tightened their belts, demonstrated through sizeable layoffs and reductions in network capex spending to mitigate the higher cost of debt on their balance sheets. This translates to slower growth and eventually lower values for cell site leases. Plus, if the equity market proves to be a leading indicator, CCI’s, SBAC’s and AMT’s 40%, 30% and 27% respective drops over the past year is an ominous sign for wireless assets.
The (Potentially) Ugly: As commercial real estate loans come due, inventory rises and values fall
The prolonged period of higher interest rates is putting many commercial real estate (CRE) owners on a collision course with their lenders.
- Floating-rate loans are reaching maturity in the face of falling property values and stricter credit standards.
- If the high rates persist, office, multi-family and retail property owners may be forced to sell, creating a meaningful increase in supply that could depress values.
- In turn, the higher supply of CRE assets could drive up cell site lease (rooftops, towers, etc.) supply, weighing down individual cell site valuations even further.
While demand from digital infrastructure portfolio companies like TowerPoint will help support price stability, the opportunity for sellers will likely be negatively impacted.
The silver lining? Even if cell site leaseholders bring their assets to market in this scenario, they’re likely to be highly motivated by either asset preservation or attractive reinvestment opportunities.
The Takeaway
While rising interest rates present significant challenges across asset classes, wireless real estate remains an attractive haven for portfolio companies with ample access to capital. For now, demand for cell site leases remains high and cell site owners continue to take advantage of liquidity at undeniably compelling prices.
