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Effects of Rising Interest Rates on Commercial Real Estate

June 19, 2023

Written by Gary Brozowski | Senior Vice President, Director of Commercial Real Estate Lending

Commercial real estate is a crucial component of the economy, and it can be significantly impacted by interest rates. When interest rates rise, it becomes more expensive for owners and investors to borrow money which leads to fewer investments in commercial real estate.


Higher Borrowing Costs

Higher interest rates mean higher borrowing costs. High interest rates can have a significant impact on the commercial real estate market due to higher borrowing costs and driving down demand from developers and investors. This can lead to a slowdown in the construction and development of new properties because developers may become hesitant to take on the added financing costs associated with a commercial real estate property.

 

Higher Monthly Payments

High interest rates can have a major impact on commercial real estate investments especially regarding both monthly loan payments and overall returns. Higher interest rates lead to higher monthly payments for investors, meaning that they must pay out more money every month to maintain their properties and keep them rented out. This can lead to lower overall return on their investment, which is a significant concern for investors.

 

Impact on Real Estate Loans

The unpredictability of interest rates, inflation, and economic performance have significantly slowed the commercial real estate transaction market during the last year. Higher cost of debt is putting increased pressure on new real estate developments due to difficulty locating financing sources which fit within a project's budget. Real estate owners and investors are carefully following interest rates, but many are still left wondering how interest rates may affect the future viability of their commercial real estate investments.

 

How to Prepare for Rising Interest Rates

There are several actions that real estate owners and investors can take to mitigate the effects of rising interest rates on commercial real estate projects. One of the most effective ways is to lock in long-term fixed rate financing instead of opting for lower floating rate loans which may have an initial lower rate but would be detrimental for your projects cash flow if rates continue to increase.  Additionally, there is always the option of refinancing the loan at a later date once rates normalize.  

Real estate owners and investors can also explore alternative financing options such as bringing on additional partners or utilize crowdfunding for additional equity in their projects.  These options can assist in spreading the overall risk of the project and by lowering the overall debt level of the project by having more equity in the deal.  In a rising rate environment, it also may be prudent to keep lower overall debt levels on your real estate investments which can help them weather the impact of rising interest rates.

When evaluating their projects, owners and investors should be realistic in their estimates of rental rates and anticipated rental growth in a particular market and have knowledge of actual operating expenses for their project.   Being knowledgeable about your market and operations of your project is crucial to the overall evaluation of any real estate project or investment

Rising interest rates can have a significant impact on commercial real estate projects. Higher borrowing costs and higher monthly payments can lead to slower growth and lower overall returns on investment. However, businesses can take steps to mitigate the effects of rising interest rates, such as locking in long-term financing and reducing their overall debt load. By doing so, they can help ensure the success of their commercial real estate projects in the face of changing economic conditions.

 

About Gary

Gary Brozowski is focused on leading Kearny Bank’s commercial real estate lending activities throughout our home state of New Jersey, as well as in New York and Pennsylvania. In essence, this entails management and oversight of transactions on multifamily, mixed use, and industrial projects across our market area. Gary has held various senior management positions related to real estate finance during his career, and immediately prior to joining Kearny Bank was Vice President of Northeast Originations for Alliant Capital. He holds a masters in Real Estate Investment and Development from New York University, and a bachelor’s from Rowan University. A member both of the National Association of Home Builders and the Mortgage Bankers Association, he currently resides in Wayne, NJ.

Contact Gary: 

973-244-8834 EXT 78834

[email protected]

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