The Hot Topic: How Hiking Interest Rates Are Shaping Commercial Real Estate

Commercial real estate has been a go-to investment for individuals, institutions, and corporations looking to diversify their portfolios and generate steady returns.

Like anything else, the commercial real estate market is not immune to external economic factors, and one of the most significant factors that can throw things off-kilter is interest rates. As interest rates rise, the commercial real estate landscape experiences a series of profound effects that can impact investors, property owners, and the market as a whole. In this post, we’ll dive into the various ways in which rising interest rates can rock the world of commercial real estate.

Borrowing Costs Go Through the Roof

As interest rates climb, the cost of borrowing for commercial real estate shoots up too. This can make it more expensive to finance loans for property acquisition or development, putting a damper on new investments and making it more challenging for existing property owners to refinance their debt. The higher borrowing costs can lead to reduced property valuations and limit the profitability of real estate projects, potentially slowing down the market.

Property Values Take a Hit

Higher interest rates tend to lower property values because the higher cost of borrowing reduces the demand for commercial real estate. As the pool of potential buyers or renters shrinks, sellers may have to lower their asking prices to attract buyers or tenants. This decline in property values can have a cascading effect on the overall market, leading to lower returns for investors and causing concerns among property owners. Let’s look at today’s average rates, courtesy of StackSource.com:

Net Operating Income Gets a Squeeze

Rising interest rates can affect the net operating income (NOI) of commercial properties. When property owners face higher mortgage payments due to increased interest rates, it can put pressure on their cash flows. As a result, property owners may have to increase rents to maintain their profit margins, which can be challenging if the local market is not conducive to higher rental rates. This can create a delicate balancing act for property owners and investors.

Investors Reassess Their Game Plan

In a rising interest rate environment, investors often reassess their portfolio allocations. With the expectation of lower returns and increased borrowing costs in the commercial real estate sector, some may shift their investments to other asset classes that offer more attractive risk-adjusted returns. This shift in investor preferences can lead to reduced demand in the commercial real estate market and further impact property values.

Property Types Are Not Created Equal

Different types of commercial real estate may be affected differently by rising interest rates. For example, the impact on office and retail properties may be more significant than on industrial or multi-family properties. The demand for office space, for instance, may decrease as businesses cut back on real estate expenses in response to higher interest rates, and let’s not forget that many companies are still allowing remote work and/or hybrid schedules for their workforces. Understanding how rising rates affect specific property types is crucial for investors and property owners to make informed decisions.

The effects of rising interest rates on commercial real estate are far-reaching and complex. While higher rates can lead to increased borrowing costs, reduced property values, and shifting investor preferences, they may not necessarily spell doom for the market. Investors and property owners who keep themselves informed and adapt to changing economic conditions can still find opportunities in the commercial real estate sector. Strategies like selecting the right property types and adjusting financing options to mitigate the impact of rising rates can help navigate the challenges posed by changing interest rates. Ultimately, commercial real estate, like any investment, requires careful planning and risk management to thrive in a dynamic economic environment.

Looking for direction?

Call us today at (610) 444-7770 and let’s walk through your property investing goals, assess your risk factors, and articulate a plan that makes sense for the long game.

Then You Crash Into Me: The Commercial Real Estate Industry after Legalized Marijuana

The love/hate relationship that seems to be forming between the Commercial Real Estate industry and Marijuana may or may not be on your radar, but it is reality.

Fully legal in nine states, one inhabited territory, three native-American reservations, not to mention Washington D.C., it’s impact has been felt across multiple industries. Some cheer, others protest, but regardless, we in the commercial real estate industry need to be educated on the basic legalities as it has become commonplace for medical use and in some areas, recreationally acceptable as well. The federal law mandates that it be grown and manufactured in the state in which it is sold/consumed.

The demand and, in turn, the value for warehouse and industrial properties has significantly increased in affected regions. Climate controlled warehouses and distressed properties including former storage, data, and manufacturing are all being acquistioned and repurposed. Even the limping retail sector has been affected as in those states where retail sales have been sanctioned, as marijuana retail shops have breathed life into some of those long-time vacancies.

Here’s a run down of the basics for our region:

Pennsylvania: Medical Marijuana approved by Governor Wolf in April of 2016

Maryland: Decriminalized and Medical Use/Manufacturing/Distribution approved

Delaware: Decriminalized and Medical Use/Manufacturing/Distribution approved

New Jersey: Governor Jon Corzine signed Medical Marijuana law in January of 2010

 

There are concerns that this may be another real estate bubble that eventually pops. Even though concerns remain, this industry has sparked new property interest and investment pursuits that we in the industry cannot deny. Both Brokers and Property Owners alike seem to be riding the wave while they can. Time will tell as always.

 

 

 

Through the Looking Glass (Part 1) – Commercial Real Estate in 2015

Well it is that time again when the economists, financiers, commercial real estate execs and genies make their predictions for the New Year. As predicted by the Delloitte Center for Financial Services, rents and vacancies showed improvement, development pressed pause, REIT’s and foreign investment led the charge in activity, the standards for CRE lending were allayed and leasing was partially determined by tenant’s use of technology. The majority of sources remain positive regarding 2015’s outcome.

We have good news on the unemployment sector. The majority of the US saw a downturn in unemployment. That evidence includes those that vacated the workforce. For 2014, here are the stats:

States where unemployment experienced an annual increase:

• Alaska
• Louisiana
• North Dakota
• Vermont
• W Virginia
• Wyoming

States that experienced no change:

• DC
• Iowa
• Oregon
• Virginia

While Puerto Rico’s unemployment decreased, they still hold the highest unemployment rate at 14 percent.  The average in the nation in December was 5.69 according to NCSL data.

The prevailing inclinations as we gaze “through the looking glass” are:

• Enduring returns of REIT’s
• Expanded funding sources on a global scale
• GDP growth trend
• Investment transactions rise
• Construction Industry gradual recovery
• Technology advances
• Industrial property development growth
• Suburban markets making a comeback

The potential perils and pitfalls foreseen in wonderland, pardon me, CRE-land include currently delayed, yet inevitable Treasury rate escalations, federal regulatory ambivalence, the predicted plunge in US labor force growth two years from now, aging infrastructure and vacillating energy prices.

In Through the Looking Glass (Part 2) we will further explore the nuts and bolts of the industry findings…stay tuned.

Resources:

Deloitte Center for Financial Services, Deloitte Development LLC, 2014 “2015 Commercial Real Estate Outlook”

Urban Land Institute & PWC, “Emerging Trends in Real Estate – US and Canada 2015”

National Conference of State Legislatures, http://www.ncsl.org/research/labor-and-employment/2014-state-unemployment-rates.aspx, December 19, 2014

And the winning category is…

Everyone is speculating, forecasting, throwing their opinions up against the wall to see what sticks in regard to 2014 and what it holds for the commercial real estate industry. Realistic observations made by many in #cre present the industrial category as the contender for 2014. When serious Commercial Real Estate Investors were polled and they cited “warehousing” as a hot commodity and a leading performer.

This is a natural response to the retail industry’s desire to move the distributable goods closer to metro areas for effortless dissemination. There are new players trying their hand at the e-commerce game. It’s not just for the colossal behemoths like Amazon.com. Oh no sir or madam. Little mom and pop shops are bellying up and saying, “pour me some of what he’s having”. The warehouse industry doesn’t have to thank their lucky stars. They need to be thanking the retail industry not only getting them back on their feet, but in running shape once again.

As you may have guessed, development has increased in reply to the shout-out for logistics for the e-commerce business models. While our brick and mortar stores limp along, the fulfillment centers are exceeding expectations. Maybe, just maybe this will provide a much-needed boost for the commercial construction industry as well. They are still attempting to recover from their fall from glory in 2007. Watch for potential cost increases in materials, services and land. Welcome to the new age of retail, people. Tech forward, mobile friendly and innovative.

Chester County US1 – The Next Frontier

According to the CCEDC (Chester County Economic Development Council) a new CCEDC-led taskforce has been created to facilitate new business along the US1 corridor from Kennett Square and traveling Southbound to the Maryland line. This is our backyard folks. We are excited and anticipating the opportunities this poses for the Southern Chester County business community, not to mention the Commercial Real Estate biz in our local region.

Representatives from a dozen municipalities have come together to brainstorm and create a “draw” to this specific area of the Greater Delaware Valley. Within the next ten years, they estimate 3 million sf of commercial real estate to be in the project development stages.

The foremost hurdle they must bound is targeting the issues that hinder new growth and interest. Pinpointing those ball-and-chains is paramount before moving forward with new marketing and splash about Chester County. Key infrastructure challenges include public transportation, sewer and water utilities, affordable housing, land planning and the overall approval process. Without a coordinated effort by all key parties, we lose countless opportunities to other states. Jobs and revenue cast away for naught. Agencies working together, efficiencies in executing new utility extensions honed and innovative implementations by the local leadership would all be integral portions of this new “plan” as I see it.

We do have positive attributes going for us. Large thriving companies have made their home here. They include:

• Herrs Corporation
• Dansko Corporation
• Everfast
• Dole Mushroom
• Flowers Foods/Tasty Baking Oxford
• Genesis Health Care
• W.L. Gore & Associates, Inc.
• Neuchatel Chocolates dba Confiseurs, Inc.
• Leading Edge Composites, Inc.
• Pollert Plastic Systems
• Endo Pharmaceuticals

We look forward to new possibilities, challenges and successes for the Southern Chester County corridor and are very proud to be a part of the transformation of a new portal of flourishing business and industry.

Care to Dance?

When analyzing the current economy and market conditions, often times Commercial Real Estate and Residential Real Estate are assimilated in the reports. Although similar, they are often found dancing to different “tunes” on the same dance floor. What I mean by this is that although they are operating simultaneously in a wavering economy, they are distinct, which has allowed for the Commercial Real Estate industry to “creatively” overcome and seek sustenance in other ways that the housing market does not provide. Some examples of those new dance steps are:
REIT Running Man:
REIT’s are pushing for rent increases on multi-units, due to apartment and housing turnover trends at record lows due to inability to acquire mortgages. Public REIT’s are said to be paying yields in the 3.5% range. If you shift to the private sector, you can expect somewhere in the 8’s. Commercial Real Estate can also be considered an inflation hedge.

Buy or Build Butterfly:
Large Developers are focusing on new construction retail projects while some remain conservative favoring property acquisitions. When considering an acquisition, take a careful look beyond the cash flow. What will the rent income be when the current leases terminate? Novice investors miss this all of the time. Commercial Real Estate as a whole is driven by jobs, particularly the office and industrial sector. Consumer spending drives retail. Although the multi-unit industry has made remarkable improvement, we see a need to shrink the chasm between new construction costs and trending rental rates.

Land Limbo:
Buying land in the current market can be sketchy at best. Land with approvals, availability of utilities and located within the “right market”…it’s like trying to find a customized car with all of your wish list features off the lot of the used car dealer. Before jumping in with both feet, most investors are considering several items of interest when performing their due diligence:
Demand – What is the demand for the project?
Dinero – What will my ROI be and how far out can I expect my rate of return?
Domination – What bureaucratic hullabaloo will I have to endure to gain the “blessing” to execute this project and how long will it take to come to fruition? Also, will you be able to sell the property when you are ready to? What will it take?

The Lean,..oh I mean GREEN wit it, Rock wit it:
As an owner/investor, green solutions can potentially provide tenant attraction and maximize your property value. Applying Green initiatives to your current property can influence negotiations, improve operations and sustainability, boost tenancy and rent rates, improve the property to optimize sales price and attract “green” buyers.