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.

Is Oxford the Next High-Growth Area for Southern Chester County?

Oxford Borough

Growth moves down the corridor of US-1, maybe not at the speed or intensity of the commercial property pricing drops or increases from east to west, north to south, but nonetheless, it moves.

The pandemic has hit so many small “mom and pop” towns with lethal blows to their economy and small business bases. As a local resident, I have been discouraged by seeing businesses close up over the COVID-19 pandemic, but I have also been encouraged by the way that the Oxford/Nottingham community has pulled together to support local and helped existing businesses sustain and even thrive in spite of the challenges they face, and as a bonus, encourage new entrepreneurship within the area with new “pop-up” establishments, like the “Rudolph’s Bourbon Bar” over the Christmas Holiday Season. Our local leaders really stepped up to the challenge of the “new normal”. Cameron’s Hardware helped us by offering no-contact pickup, and other retailers offered delivery via UBER eats and DoorDash. We saw what I’d like to call “Creative Sustainability” all around us. Existing local businesses like DuBarry have created brick-and-mortar spaces fronting on “Oxford Main Street” and are doing quite well. Home to great local eateries like Sawmill Grill, The Octoraro Tavern & Grill, Wholly Grounds, La Sicilia, Andres, the Nottingham Creamery, and Little Miss Oxford Diner, this town is full of character and charm. The new parking garage is a tremendous benefit to the retailers in our area. Oxford is also home to large businesses such as Neuchatel Chocolates, Tasty Baking Company, and The Scotts Company.

We are watching local entrepreneurs emerging such as the Whisky Shack, Smokin Dragons, Pickled Pickles, and Sweet Cakes, bringing new life and excitement to our area.

The Preston & Steve Show featured our own BellyBusters as one of the top 10 cheesesteaks of 1,000 different varieties taste-tested in the area! Now that’s impressive! Oxford Mainstreet Inc. announced that First Fridays will be starting up again in April. That’s just around the corner! There’s a lot of positive things going on in Southern Chester County during this arduous pandemic.

We have a unique opportunity available within the borough limits to present to you:

• 6,895 sf
• 2 story office building
• 40 car parking
• Could be used as:
  • Office
  • Medical
  • Flex
  • Institutional
  • Finance
  • Professional Services
• 1st floor amenities:
  • 11 Cubicle Offices
  • 2 Private Offices with smoke glass privacy
  • 1 Large Conference Room with smoke glass privacy
  • 1 Small Conference Room
  • 1 reception area
  • 2 restrooms
  • Large kitchenette area/employee lunchroom
  • Heated storage area
  • Roll-up drive-in delivery door (8×8) in the rear
• 2nd floor amenities:
  • 18 cubicle offices
  • 3 private offices
  • Server room
  • Small kitchenette area
  • 1 coat closet
  • 2 restrooms

Click here to tour this amazing space virtually:

Click Here to Request an Informational Packet

Welcome ARK Pain Management to the Beiler-Campbell Business Center

ARK Spine Care & Pain Management offers the most comprehensive non-operative pain management care available. Dr. Jha is a triple board certified (Pain management, Neurology, Psychiatry) physician who is dedicated to upholding the highest professional standards and providing the highest quality of healthcare while striving to deliver pain relief for her patients.

Chronic pain is a complex condition with multiple layers of challenges, many which unfortunately are invisible to others except for the person suffering. It often has multiple facets to its presentation ranging from physical and emotional to social factors. Unfortunately, very commonly, chronic pain goes untreated or under-treated in our society.
Given the complexity, the essence of comprehensive pain management at ARK Spine Care & Pain Management includes a multimodal approach, which includes different modalities spanning from physical therapy, medications, psychological treatments if indicated, and injections. Reliance on only one modality may result in minimal or partial improvements. Our ultimate goal is to improve our patient’s level of functioning and pain scores in the most compassionate and safe way.

Providing the most advanced medical approaches and highest quality of pain management, Dr. Jha strives to work with patients to develop a plan of care that best meets the needs of each individual. She evaluates patients with a variety of pain problems and devises a carefully thought out treatment plan according to each unique pain problem. Implementing interventional and non-interventional therapies of pain management to deliver effective comprehensive care, ARK Spine Care & Pain Management provides the highest quality of non-operative pain management available.

 

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.