In the ever-changing landscape of commercial real estate, understanding the impact of rising interest rates is crucial. As noted by experts at EY-US, a strong economy can sometimes offset the negative impacts. Various factors such as economic growth, inflation, and market conditions influence this complex relationship.
It is essential to consider the direct and indirect effects. Higher interest rates often lead to decreased property values due to the reduced cash flow (JP Morgan) to a new purchaser. This has limited effects on current property owners with a fixed mortgage rate but will impact potential purchasers needing new financing. Trying to recapture those increased holding costs in rents can also lead to increased vacancy rates as higher costs may deter new tenants.
So, what strategies can investors employ to mitigate these impacts? Proper research and due diligence are key to making informed decisions (Plante Moran). Locking in current rates with fixed-rate mortgages can protect against future rate increases, and diversification across different asset classes can also provide a hedge against interest rate risks.
Reports indicate that increased borrowing costs have led to a decline in commercial retail property values. Real-world examples and expert insights further underscore this relationship. As interest rates increase, the cost of owning increases, resulting in either the return to the equity declining and/or an increase in the capitalization rate. To date, for some property types, market demand has remained strong resulting in little decline in value noted in the Quad Cities.
Staying informed and adaptable is crucial in this dynamic interest rate environment. With the right strategies and a keen understanding of market dynamics, it is possible to mitigate the profound impact that rising interest rates can have on the commercial real estate market, say experts at Kearny Bank.
For more insights, check out our blog post on What Changes the Value of Commercial Property. If you think you might need a commercial real estate appraisal, feel free to explore our services or contact us for further discussion.