Since the interest rates in the United States have consistenly been kept low to encourage economic growht, any news or sign of an increase in these rates can make monumental differences in how real estate investors operate.
Naturally, many investors are quick to assume that rising rates will make their commercial real estate investments less valuable and reduce their income.
Is it really true? Will the rise in interest rates impact commercial real estate? Let’s find out!
Impact Of Interest Rates On Commercial Real Estate
If we assume every other economic variable constant, rising interest rates can lead to a reduction in the prices of commercial real estate properties as borrowing becomes more expensive.
It’s important to note that the tenants will pay the same amount of rent agreed in the lease agreement unless stated otherwise.
Hence, the value of future cash flow will also see a decrease due to higher discounting rates which will reduce the returns received by rental owners.
But that’s not the case…
In reality, a change in interest rates also affects other variables involved in the economy.
Therefore, we cannot evaluate the impact of rising interest rates in isolation. For starters, interest rates increase when there’s an improvement in the overall economic conditions.
Currently, the US economy is in a better position with low unemployement rates and growth in GDP. Moreover, the controversial Tax Cuts and Jobs Act has lowered the corporate tax rate.
Hence, commercial investors may, in fact, enjoy better occupancy rates and rent growth.
Rising interest rates are also correlated to inflation, which is actually great for commercial real estate investors.
Inflation leads to an increase in prices for commodities and services, and also raise the value of hard assets like real estate.
As a matter of fact, many investors consider commercial real estate property a good hedge against inflation.
When it comes to investing , commercial real estate can be a complex category and it’s very important for investors to understand how economic factors can affect the financial performance of their investments.
About Global Capital Partners Fund
Global Capital Partners Fund is a leading private lending firm that offers hard money loans to business owners and individuals in Atlanta, GA. The company aims to help commercial real estate investors obtain quick financing and capitalize on profitable opportunities available in the market. GCP Fund offers an extensive range of financing solutions, including asset-based lending, bridge financing, and more.