Whether you own rental properties for income or look to buy commercial real estate shortly, you know that interest rates impact the bottom line. With rates rising steadily, this can make or break a transaction.
In some cases, though, rising interest rates could increase the appeal of CRE.
The negative impact of rising rates
The Business Journal reports that interest rates for investment properties rose in early 2022 and experts expect this trend to continue for quite some time, even into 2023. This makes borrowing more expensive and exerts some downward pressure on the valuation and pricing of properties for sale.
This environment, occurring due to the high rate of inflation, typically results in investors showing more caution. This means that sellers have to find willing buyers, which could require a lowering of the asking price. That is because buyers refrain from using debt to purchase a property, as the high-interest rates reduce cash flow.
Potential positive impacts of rising rates
The rise in interest rates typically occurs in an inflationary environment and this often exerts upward pressure on rental costs. It will also likely exert an inflationary price on all commercial real estate, providing demand and occupancy remain high, though this could take several months or even years.
A volatile market in both real estate and stocks and bonds makes it challenging for investors, but opportunities still exist. Many investors see real estate as a more stable investment at this time, as the value of the property works as an inflation hedge. As always, changing economic conditions call for intelligent strategies in CRE.