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What Does an Interest Rate Increase Mean for Commercial Real Estate?

Posted by Keith Darby on December 15, 2015
44 Comments

There has been talk for years that interest rates may increase now that the US economy is healthier. However, it looks like the hike on short term rates could very well happen when the Federal Open Market committee meets tomorrow, December 16.

The benchmark interest rate has been kept between zero and one-quarter percent since 2008. The low rate was meant to encourage both corporate and private investments. Now that job growth has been steady and unemployment down, the Fed is looking to increase the short term interest rate to curb the risk of  inflation. However, with increased rates, there is the chance that the stock market dips, mortgages rise and jobs to become scarcer. Many economists don’t think an increased interest rate will net these negative results though.

The next to zero interest rates of the past few years have been very good for commercial real estate, with many investors placing their assets in commercial real estate in search of higher returns. With increased demand on commercial real estate investments, prices have increased over the past few years. According to Moody’s Investors Service, U.S. commercial real-estate prices are at a peak, up 93% from 2010 and 16% above the previous peak in 2007. The increased interest rate could actually be a good thing for real estate, helping to slow a real estate bubble and ensure it won’t drastically burst.

A rate hike could prove to be even more positive for commercial real estate in Miami, at least in the short term. As the US economy becomes stronger, it’s perceived as a secure investment for foreign capital. Miami is known for foreign investment, especially from investors with less stable home economies. Foreign investments could increase with the perceived increased strength of the US economy the rate hike signals. A strong US economy, signalled by the higher interest rate, could trigger higher occupancy rates and rents could increase in the short term, which would improve operating earnings for investors.

However in the long term higher interest rates are usually interpreted to be less favorable for commercial real estate investors. In the long term, higher interest rates discount property value earnings.

Keith Darby, President of RISE Realty, says “The interest rate has held steady for years. It will eventually have to increase, and we will have to watch the market even more closely to protect our clients’ commercial real estate investments. Our years of experience helps our investors manage the marketplace changes.”

 

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