The Federal Reserve’s recent hike on rates has prompted questions about where that leaves investors, and what exactly this rise will affect. Let’s now take a look at what this means for commercial real estate.

With the number of real estate buyers shrinking, the demand for housing is moderate. This leaves the opportunity for serious buyers to be more selective and not need to be as competitive in bidding. With the decrease in demand, materials for new construction should become more available and affordable.

The cost of borrowing has been extremely low for an extended period of time and has now begun to increase. The Federal Reserve’s interest rate sat at 0% for over 3 years and now ranges from 0.75-1%, but is expected to possibly nearly triple in 2023. Although the Federal Reserve claims that they do not wish to continue to raise these rates, due to inflation, they say this increase will not end soon.

The Benefits of Rising Interest Rates

Despite the dissatisfaction expressed by the general public about inflation, the cost of goods are still expected to rise. The Chairman of the Federal Reserve states: “We understand that our actions affect communities, families and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum employment and price stability goals.”

Expectations of continuing increases in the prime lending rate adds pressure to shoppers to decide on property. The uncertainty of these rising commercial mortgage rates has no end in sight, and any rate in the present may be the lowest rate for some time. Then, again, investors may be waiting for a better rate. This pause can create an increase in commercial real estate vacancies, allowing investors to have a greater selection.

As mentioned before, the purchasing rate of real estate was record-high. High rates will assist to slow the rush of investing. This equates to more property listings, although they may not be new construction properties, since the shortage of building materials is still present. Even with these hurdles to market, there is still tons of opportunity in new construction projects.

Soon after the market cools, prices of commercial real estate will drop due to less demand. Since there was so much demand for both housing and commercial real estate, it made sense that the cost for such properties continued to rise with demand. Investing in existing properties still allows investors to purchase properties without the expense of construction materials.

Existing commercial real estate properties will reach more affordable prices for those looking to purchase. The aftermath of the last few years’ real estate-purchasing frenzy has created prices out of people’s reach. However, with existing properties reaching an affordable price, this can help sell properties that have been sitting on the market for too long. Investors can also work with an existing property rather than bear the expenses and delay of construction to be completed.

To ensure you are receiving full service, be sure to look into multiple lenders and get an idea of all of your options. Some lenders’ prices, terms, and LTV vary based on location, so look into multiple lenders to see what they can offer you.

Reach out to lenders directly when inquiring about a rate. It is beneficial to negotiate. Like all extended offers, duration, valuation, balloon payments and interest rates are subject to the uniqueness of your circumstances. Do not hesitate to go over your credentials with your lending advisor to negotiate the best rate for you.