Commercial Real Estate: Investing in a Volatile Interest Rate Market

January 17, 2024

Do rising interest rates have you wondering how your commercial real estate investments will be affected? Whether you already own commercial real estate or if you are trying to decide if now is the time to invest, interest rates will always have an impact on both cash flow and property valuations.

  • Increased borrowing costs: If you need to take out a loan to finance your commercial real estate investment, a rise in interest rates will increase the cost of borrowing. This can make it more expensive to purchase or refinance a property and may affect your profitability.
  • Decreased demand for real estate: Higher interest rates can also make it more expensive for businesses to borrow money, which may lead to a decrease in demand for commercial real estate. However, because interest rates are rising and the credit market is tightening there may be an increased demand for leasing property when not all potential buyers can get the loan or the loan terms they need to make their deal work. This could be great news for owners who already own property, as they may see vacancy numbers decrease.
  • Reduced valuations: Higher interest rates may also lead to a decrease in property values, as investors and lenders may be less willing to pay as much for a property due to the increased cost of borrowing. This could result in a decline in the value of investments you already hold, as CAP rates increase.
  • Cash buyers: if you are a cash buyer this may be a great time to buy at a more favorable valuation, and when interest rates come back down to a more favorable rate you may want to consider financing your investment. This would allow you to pull your cash out to make other investments or purchases.
  • Buying down the rate: One strategy to consider when you are thinking about buying in a higher interest rate market is the value of buying down the rate over the life of the loan, this involves paying more points at closing in lieu of making a higher down payment. If you plan to refinance in the near future this may not be your best move.
  • Be Creative and Persistant: Commercial lending rates can be determined by various SWAP markets, Prime Rate and other securities. Ask your lender about all their options and check back often. Check out our website home page for a real time rate ticker.
  • Owner Financing: With the markets volatile and softening, Sellers may consider self financing the property.
  • Penalties: If you purchase now and plan to refinance once rates come back down you need tobe sure you know about any penalties that might be associated with a refinanceand negotiate accordingly.

Overall, while rising interest rates have mostly negative impacts on commercial real estate investments there are strategies to take advantage of some aspects of the situation. It's important to carefully consider the potential effects of interest rates when making investment decisions. Commercial Real Estate, as with any investment,is highly dependent on each individual or institution’s particular needs and situation. You should always carefully analyze all aspects of an investment or disposition with your financial and tax consultants. At Fleske Commercial Group,we want to be your trusted real estate advisors who can help you make informed decisions during both stable and volatile periods. Our brokers have the knowledge, experience and relationships to help our clients not just survive but thrive during periods of uncertainty.

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