When the U.S. Prime Rate rose to 21.5% back in 1980, the cost of both buying commercial property and refinancing became very expensive. This was not a good time for the economy and the fact that interest rates
were so high back then greatly reduced people’s interest in buying commercial properties. In addition,
our businesses being faced with higher interest rates at the time wasn’t helping our economy either. It was a
crazy time, and the prime rate rose from just 11% all the way up to 21.5% in just five months!
But then the prime rate began falling, and it continued to do so for decades, and this greatly assisted with the resurgence in real estate values beginning in the mid-1980s. Then by 1985 the prime rate had once again returned to being below 10%, and our real estate activity was firmly on the rise once again.
So in keeping this in mind, how much do the changes in the interest rate impact the value of commercial properties? Well back in 1980, the rise in interest rates was so dramatic within such a short period of time, that this had a big impact on commercial property values. When you’re looking at the interest rate almost doubling within five months, this alone will get many people to just sit on the sidelines and scratch their heads, wondering what the heck is going on.
But when interest rates change slowly over time, as they have within recent years, this can then have a less pronounced impact on overall property values. In addition, once the prime rate began falling in the 1980s, this overall trend then continued on for decades, exerting its own positive impact on our real estate market.
But the economy and the overall demand for commercial real estate come into play also, such that when demand is strong, and property values are rising, people will still want to buy commercial properties even when interest rates are rising.
However, in a real estate market where activity has been cooling down, and where people don’t believe that they’ll get the same level of appreciation anymore if they buy right now, any upward move in interest rates can then cool their desire to buy. Because when you’re on the fence, and you’ll now be faced with higher monthly payments if you buy, this can then eliminate your desire to buy altogether.
So lower interest rates can help stimulate more people to buy property, and higher interest rates can remove people’s interest in buying, or at the minimum, this can then cause them to demand to buy at lower prices. But the overall trend in the real estate market, and whether or not the market is hot, can have an even greater impact on everyone’s desire to buy.