Two Key Points to Know About Rising Interest Rates and Commercial Real Estate
What you need to know:
- Rates are expected to rise an estimated six additional times this year for a total of seven increases.
- Rising interest rates could affect the overall total cost of your project.
- When inflation rates are high, federal funding rates increase to help balance the economy.
- Your banker can help you evaluate options for variable versus fixed rates on your loans to determine the best option for you.
The Federal Reserve is expected to raise the federal funding rate a total of seven times in 2022.
When inflation rates are high, the federal funding rates increases as well to help balance the economy.
How do interest rates affect non-owner occupied commercial real estate?
- Rising interest rates can increase the project expenses, which can adversely impact cash flow and economics, particularly if lease rates cannot be immediately adjusted.
- Rising interest rates can adversely impact some tenants’ ability to meet their lease obligations.
- Increased interest expenses may mean less cash flow. This could create negative impact on the value of commercial real estate.
- Increased borrow costs are often passed on to tenants, negatively impacting value and increasing the time needed to lease or sell a property.
- The borrower may have to contribute more equity to achieve a positive cash flow.
How will talking to a banker help you navigate the changes with construction or commercial real estate loans?
- A banker can help you evaluate refinancing options that may help you find fixed interest rate alternatives, resulting in lower long-term expenses.
- Bankers are here to help you evaluate your overall commercial real estate portfolio and other business assets for potential alternatives to reduce the interest rate sensitivity in your capital structure of the commercial real estate project.