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How Will a Rise in Interest Rates Affect the Commercial Real Estate Market?

In the past couple years, overall interest rates have risen several times in the United States. According to many experts, they are likely to finally stabilize in 2020. However, they have already risen sufficiently enough in 2018 and 2019, and we cannot be sure that the same won’t happen by the end of 2020, or especially the year after.

With that in mind, the commercial real estate market needs to start preparing for a possible rise that can have significant effects. 

But what are those effects? How does a rising interest rate affect the commercial real estate market? If you want to know the answers, you've come to the right place, as this article aims to give you all the information you need. Let's take a look.

How Interest Rates Affect Real Estate Values

For those who are unaware, interest rates, like the ones on Treasury bills and interbank exchanges, have a massive effect on the value of commercial real estate and all property, for that matter. 

That’s because they influence the ability of people to buy property by increasing or decreasing mortgage capital costs. However, that’s only one part. Interest rates also affect capital flows, supply and demand, and much more. When all of that is considered, we can conclude that interest rates have a profound effect on the commercial real estate market in a wide variety of ways. 

However, we are only interested in the higher interest rates and how they affect the commercial real estate market. And that is a whole different story.

How A Rise in Interest Rates Affects Real Estate

In general, most investment property owners and landlords believe that a rise in interest rates negatively affects the value and income from their property and further investments. One of the main reasons for this is the fact that interest rates have been very low for a very long time, until a few years ago. 

However, in reality, this hadn't affected the market in the past when interest rates were very high. If you were to exclude all other factors in the economy, a rise in interest rates would naturally result in lower income and lower value of commercial real estate. Buyers usually borrow money to buy property, and an increase in interest rates can only mean that it will cost them more to borrow the said money. 

Naturally, that would be the case if all factors were to be excluded. As they cannot be, when we take a look at all of them, it becomes much harder to predict what will happen to the commercial real estate market. All of those factors can reduce, or even altogether remove the negative effects that higher interest rates have on commercial real estate. 

The main factor we need to consider is the overall economic condition in the economy of the United States. Rising interest rates usually mean that the conditions are improving, and that's certainly been the case in the last couple of years. That can only mean that the value of commercial real estate could remain the same or even rise. 

The Bottom Line

It’s hard to give accurate predictions on this topic, as there is no single cause and effect correlation between interest rates and the real estate market. 

The only thing that we can tell you is that history shows us that rising interest rates rarely negatively affect the commercial real estate market. 

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