Economic and commercial real estate (CRE) experts have had their attention tuned to CRE interest rates lately. This is especially true if you’re an investor searching for potentially lucrative properties to add to your portfolio–is this a good time to buy? Or should you wait out the uncertainty to see if the market changes? Although investing is always a risk regardless of the CRE interest rate, knowing those numbers can make or break a purchase (or leasing) decision. That said, let’s take a closer look at recent CRE interest rates and how they have been affecting investors in the marketplace.
2018 Outlook: Uncertainty Reigns Supreme
CRE interest rates depend on several factors all mixed together:
- Supply and demand
- Inflation
- The Federal Reserve
Supply and demand and inflation are relatively easy factors to track, the Federal Reserve is a little less unpredictable. This is especially true given that a new Federal Reserve Chairman was recently instated, so uncertainty remains as to whether or not Jerome Powell will stick to the federal government’s plan to continue raising interest rates. In December, the benchmark rate rose from 1.25% to 1.5%, and in their most recent policy meeting, they left the forecast for three 2018 rate hikes unchanged, which follows three increases in 2017.
Despite this uncertainty, the ten year Treasury rate has been fairly stable in recent years, meaning the market may not be convinced that the federal government will raise rates significantly. CRE rates also depend on the pace of inflation–if it accelerates, then rate hikes will be more likely. On the other hand, if inflation remains sluggish, the government will have a harder time justifying additional rate increases.
Cautious Optimism in CRE
In terms of the CRE industry, this uncertainty could end in one of two scenarios. If interest rates don’t increase significantly, the cost of borrowing and property values would be stable; conversely, no significant rate hikes could pose the risk of a bubble since lending standards would tighten. This would indicate that the economy is not very strong, which poses a domino effect for other industries, including CRE.
Notably, interest rates aren’t the only detail that CRE investors should focus on–a strong and growing economy can be a positive indicator for business even if rates do rise. When the economy is growing, jobs, wages, and stable inflation also grow. As a result, investors will have steadier cash flow as well as the ability to raise rents and sales prices.
Furthermore, many markets are seeing an oversupply of high-end properties. So in this case, higher interest rates can temper the risk of oversupply by motivating borrowers to be more cautious with financing on new construction.
Final Thoughts
In the end, CRE investors should be able to withstand any interest rate range if they create a balance sheet and portfolio that can withstand increases in interest rates. The worst position to be in is having to sell in a down market; instead, you want to purchase properties that have too much leverage during a downturn. This way, investors can benefit from the cycle of CRE regardless of the interest rate.
At Murphy Commercial Real Estate, we take pride in providing a level of personal service above and beyond the services offered by “traditional” commercial real estate firms. For more information on how to best navigate the CRE space, contact us today.
