How Rising Interest Rates Have Impacted the Commercial Real Estate Industry
3 min read
The commercial real estate industry is a dynamic and exciting sector that can yield substantial financial returns for investors. However, fluctuations in interest rates can significantly impact the industry, making it critical for professionals to pay attention to these changes. In this context, the Bank of Canada's high-interest rates has been a cause for concern, as they can lead to various effects that impact investors, borrowers, and market trends.
Below are five main effects that have impacted the commercial real estate market.
1. Decreasing Demand for Investment: Investing in commercial real estate can yield substantial financial returns. Nevertheless, increasing interest rates may cause some investors to rethink their investment decisions. As interest rates rise, the overall cost of investment can escalate, leading to decreased sales and leasing activity, and lower demand for new development projects.
2. Cost of Borrowing Increase: An uptick in interest rates can lead to elevated borrowing expenses for commercial real estate investors. This, in turn, can impede their ability to execute transactions or commence new projects, diminishing their returns on current investments.
3. Property Value Drop as Capitalization Rates Rise: The primary goal of commercial real estate investors is to generate value from their investments. In this regard, capitalization rates play a crucial role as they provide a valuable tool for investors to compare the potential returns of different properties. When interest rates rise, cap rates also tend to increase, as higher interest rates increase the cost of borrowing for investors. This makes investors less willing to pay high prices for commercial real estate assets, decreasing their value.
4. Financial Difficulties: Due to high-interest rates, it is challenging for investors to qualify for loans. This can further hinder investment in commercial real estate, as it becomes harder to finance acquisitions or refinance existing debt. As a result, the ability of investors to invest in the market can be limited, leading to a slowdown in the industry. This can result in delays or cancellations of new projects due to a lack of funding.
5. Slowdown in Economic Growth: Running businesses become more expensive as inflation grows, leading to a slowdown in economic growth. Consumers may have less disposable income, which can result in a reduction in spending. Businesses may also the opting to save money by reducing their overhead costs, which in turn, can reduce their use of commercial real estate. This can have a ripple effect on other industries and the overall economy.
Overall, increasing interest rates can significantly impact the commercial real estate industry, affecting investors, borrowers, and market trends. By staying informed and adjusting their strategies accordingly, commercial real estate professionals can navigate changing market conditions and thrive in this dynamic and exciting industry.
References
Hudes, S. (2023, February 28). Canadian commercial real estate investment could reach high of $59B in 2023: CBRE - BNN Bloomberg. BNN Bloomberg. Retrieved April 4, 2023, from https://www.bnnbloomberg.ca/canadian-commercial-real-estate-investment-could-reach-high-of-59b-in-2023-cbre-1.1889378
Shemesh, J. (2023, May 9). How high-interest rates affect commercial real estate. Point Acquisitions. Retrieved April 4, 2023, fromhttps://pointacquisitions.com/how-high-interest-rates-affect-commercial-real-estate/
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