Impact of Rising Interest Rates
Interest rates have a huge bearing on real estate values. If you’ve been active in the real estate market over the last several years, you’ve watched interest rates fall as low as 3%. Essentially, as interest rates drop, a person can take on a higher mortgage but with the same monthly payments.
As an owner of commercial real estate, chances are your property value has increased by one basis point or a point and a half since you acquired the property. As interest rates increase, the value could be negatively impacted.
For buyers, money from the banks is so cheap at the moment that financing creates more positive leverage depending on the cap rate. The cash-on-cash return is then higher when using a down payment and loan vs. “all cash.” This is something buyers and sellers should be using to their advantage.
However, “The Fed” has been laying the groundwork for the eventuality of interest rate hikes. It is not a matter of if interest rates will rise, it is a matter of when.
In the past, the Fed has said it will be “patient” in its efforts to begin the process of “normalization”—implying that they are in no rush to start raising rates steadily from the near-zero levels they are at right now. The word “patient” has been used over and over by the Fed in regards to their plans dealing with interest rates.
Currently, all signs point to Fed Chair, Janet Yellen and company dropping “patient” from its vocabulary. We have recently started to see a slight rise in rates.
If you are an investor of commercial real estate, the time to act is now! Whether you are an experienced buyer and seller or somebody looking to start your portfolio, the time has never been better to buy or sell. The only bad news is that this window of time is closing rather quickly.
The Fed is no longer being patient in their approach to interest rates. They have backed themselves into a corner and whether it is good for the economy or not, it is inevitable that we will see further hikes in interest rates this year.