Interest rates are such an important determinant for how our economy will be performing. When the cost of capital becomes more expensive, suddenly it becomes less profitable and more risky for businesses to expand, and commercial real estate investment transactions can become less attractive, too. But on the other hand, when interest rates are falling, the cost of capital then becomes cheaper, and both business and real estate investment can benefit from this.
So when The Fed made the announcement that they’d be holding back on any interest rate increases for the duration of 2019, despite their statement just months earlier that we should expect to see multiple interest rate increases throughout 2019, what impact will this now have on both business and on commercial real estate?
Well, first of all, it allows businesses and investors to breathe a sigh of relief in knowing that they can expect interest rates to remain similar to what they have been in recent months, and this in itself can get people feeling more confident about both business, the economy, and about investing in commercial real estate, too. Then beyond this, within commercial real estate specifically, this can help properties to hold their value, and maybe even still increase in value, as new investments will still make sense at today’s higher prices.
With this in mind, when interest rates rise, and buyers are now trying to pencil out a potential investment opportunity, the higher monthly loan payments at the higher interest rate will then cause them to demand a lower price for the property, while the owner will still want the price that they could have obtained when the interest rate was still lower. Then what we can easily have ensue is a stalemate where owners won’t budge on their prices, and buyers won’t pay the owner’s asking price, and the volume of sale transactions in the marketplace can then become greatly reduced.
But the good news is that now, with interest rates now expected to remain the same, we run a much lower risk of having this stalemate occur, and we have a much better chance of seeing the continuance of a more fluid commercial real estate market. However, at the same time, if buyers begin feeling that we’re at or near the top of this real estate cycle, this could create caution also.
But at the same time, all things considered, having interest rates remain the same rather than increasing will definitely help to stimulate more overall activity.
So in closing, this pause in the rise of interest rates is good for our economy, and it will help to stimulate more business and more commercial real estate activity, too.
