The Federal Reserve again raised interest rates last week to help fight inflation. The higher interest rates no doubt affects business, as it is more expensive to borrow money. Just like business, the higher interest rates also affects the commercial real estate market, and it does so by:
- The value of existing properties decreasing: The value of property is determined by how much someone is willing to pay for that property. If it costs more to borrow money, there will be less willing and able buyers, and thus commercial property values go down. Typically, in the sale of commercial real estate, cap rates follow interest rates.
- Having less money to finance new construction projects: When money is more expensive to borrow, typically there will be decease in construction projects. Businesses may need to cut costs somewhere, and it tends to be in new construction projects.
- Having a harder time qualifying for loans to secure buildings and investment properties: Businesses could face problems when trying to secure financing for new properties. They may not qualify for a certain loan that they need, or they could face unfavorable loan terms.
How can businesses or individuals navigate through high interest rates?
Spoiler alert: businesses continue in their operations and life goes on during times of high interest rates. There are a few ways businesses can help mitigate the high cost of borrowing money. First, businesses can lock into low rates by refinancing their loans. This can help lower monthly payments and make it easier to qualify for new loans. Second, businesses can try to increase their revenue to invest more in commercial real estate. Third, individuals and businesses can work with brokers to find properties that fit within need and budget.