What you need to know about rising interest rates and their effect on real estate.
Over the past year there has been talk about the federal interest rate rising for the first time since 2006. Interest rates have different effects on the market, and there are advantages and disadvantages to their rise.
The Downside
There are a few reasons why rate hikes would be bad for commercial real estate. Being able to acquire capital (lots and lots of money) is an essential component in any commercial real estate investment whether it’s an acquisition or a new development. Either way, the higher interest rates force borrowers to pay more in interest than they would if they bought the same property a year ago. These higher interest rates deter borrowers from making large commercial real estate deals because of the enormous amount of money that they would have to pay to access money for loans or mortgages.
A second consideration is the actual cost of capital. Higher rates increase the rental cost of property, meaning borrowers could end up paying a lot more money to their lenders. This could also lead to borrowers receiving smaller loans than previously because they would either have to put up more money (equity) or invest in lower priced developments.
The Potential Benefits
Rising interest rates aren’t all doom and gloom. In fact, the impact of the federal interest rate hike could make commercial real estate a less risky venture. Again, it’s easy to see how getting a loan with higher interest rates would become more difficult, but these rising interest rates have given both lenders as well as borrowers an opportunity to minimize risk.
Higher interest rates signal a stronger economy overall. In fact, the federal reserve has not increased the interest rate since 2006 because of how poor our economy was doing; remember the recession of 2007? Real estate thrives in a healthy economy. A booming economy often leads to higher rental costs and higher sale prices.
The Conclusion
Rate hikes can be a good and bad thing for commercial real estate. In the long run, interest rate hikes seem to have a great benefit in the overall commercial real estate market.
Trust the Professionals at Clagett Enterprises for Your Commercial Real Estate Needs
If you’re looking for the perfect realtor for your business or to assist during your purchase of a commercial property, you can rely on Clagett Enterprises. Clagett Enterprises is a full-service real estate company with almost 30 years of experience in the Frederick and Western Maryland area. For assistant selling your home and getting the best possible price, contact us online or give us a call at 301-665-6009. To meet our team and see some of our beautiful homes, follow us on Facebook, Twitter, Pinterest, and Google+.