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2014 Impact of Interest Rates on Commercial Real Estate

May 1, 2014

The world is coming out of a long and painful recession. Promising economic outlooks around the world are reassuring markets of a global economic recovery. The Federal Reserve voiced their view on this economic upturn and began tapering their bond-buying program in December. Markets are eager to feed this recovery, increasing demand for commercial real estate (CRE) and longer-term interest rates by 3%. By any forecast, the recovery is good for CRE, as it creates need for new construction, boosts occupancy rates and raises rent rates.

WHAT WILL HIGHER INTEREST RATES MEAN FOR CRE?

Interest rates alone do not trigger downturn in the real estate market. Supply of space and recession correlate much more with the state of the market. However, changing interest rates should impact how you view commercial real estate as an investment.

Certain CRE assets are more sensitive to shifts in interest rates than others. The assets best able to capture improving growth are those most economically sensitive, which also means those with the shortest lease terms, such as:

  • Hotels

  • Apartments

  • Industrial

  • Malls

Higher interest rates may deter potential buyers to rent, which creates more opportunity to lease and raise rent to match consumer price index.

INVESTMENTS FOR 2014

When evaluating your commercial real estate portfolio this year, look to increase investment in markets that are positively affected or more resistant to higher interest rates. Aim for assets with shorter lease terms. Also, remember location is still king. High profile properties should be able to capture growth in this market.

Contact Intelica with your real estate investment questions and ideas.