The Federal Reserve’s decision to raise interest rates four times in 2022 had a significant impact on the commercial real estate market. How?
Let’s find out the reasons why commercial real estate brokers, lenders, and associated professionals saw so much turmoil in 2022.
Higher interest rates make borrowing capital much more expensive.
When the Fed raises interest rates, it becomes more expensive for businesses and individuals to borrow money. This can have a chilling effect on the real estate market, as investors and developers may be hesitant to take on new projects due to the higher cost of financing.
One way that the interest rate hikes affected commercial real estate was by slowing the pace of new construction. As borrowing costs increased, the profitability of new development projects declined. This led to a slowdown in the number of new buildings being built, as developers were less willing to take on the risk of constructing a new property in an environment of rising interest rates.
Higher interest rates can cause commercial real estate valuations to drop
Another impact of the interest rate hikes was on the value of existing commercial real estate properties. As borrowing costs increased, the value of these properties tended to decline. This is because the income generated by a property is discounted by the cost of borrowing, and as borrowing costs increase, the value of the property must decrease in order to maintain a similar level of profitability.
The interest rate hikes also had an impact on the overall demand for commercial real estate. As borrowing costs increased, businesses and investors were less likely to seek out new properties to purchase or lease. This led to a decline in demand for commercial real estate, which further depressed prices.
One sector of the commercial real estate market that was particularly affected by the interest rate hikes was the retail industry. Many retail businesses rely on borrowed money to finance their operations, and the higher interest rates made it more expensive for them to do so. This put additional pressure on already struggling retailers and may have contributed to the closures of some stores.
Interest rates impact the financing of commercial real estate projects.
The interest rate hikes also had an impact on the financing of commercial real estate projects. As borrowing costs increased, it became more difficult for developers to secure financing for their projects. This led to a decline in the number of new projects being financed, as lenders were less willing to take on the risk of lending money at higher interest rates.
4 Fed Rate Hikes in 2022 Had a Significant- Maybe Long Last Impact on Commercial Real Estate
Overall, the Federal Reserve’s decision to raise interest rates four times in 2022 had a significant impact on the commercial real estate market. It slowed the pace of new construction, depressed the value of existing properties, and reduced demand for commercial real estate. It also made it more difficult for developers to secure financing for new projects, further slowing the pace of new construction.
While the effects of the interest rate hikes may have been felt most strongly in the short term, they will likely have long-lasting impacts on the commercial real estate market.
