There has been a lot of concern voiced over the past few months by some commercial real estate experts about the effect rising interest rates will have on commercial real estate sales activity. The Federal Reserve has stated several times that they will likely raise interest rates before the end of the year, but the reality is most experts are confident it will not disrupt the strong activity being seen in commercial financing and property sales.
According to a report released recently by commercial real estate investment firm Marcus & Millichap, the positive economic trends that are fueling the Federal Reserve’s desire to raise rates are the exact same factors driving growth in the commercial real estate industry. Hessam Nadji, Marcus & Millichap’s senior vice president, said commercial real estate and commercial financing continue to benefit from both growth in retail sales and increasing payrolls.
These catalysts are benefiting not just large properties, but smaller ones as well. In fact, smaller income-producing properties are seeing higher rental rates and occupancies than larger ones. As a result, there are some prime investment opportunities for properties priced under $5,000,000.
Even when interest rates do increase, the Marcus & Millichap report predicted the positive forces that have supported the growth in all major commercial property types would continue despite the increase. The report noted that limited new construction in the office, retail, industrial and multifamily sectors would help drive momentum. The firm also said the overall balance that exists between renter demand and new construction in the multifamily sector will also propel growth despite higher interest rates.
Even if rates increase, the increase is expected to be small at first. For those obtaining commercial mortgages under $5,000,000, which is what we specialize in at K2 Commercial Finance, there should be little impact resulting from the increase. Furthermore, the report said that long-term rates such as the 10-year Treasury are not directly tied to short-term rates or the short end of the yield curve. Additionally, the expanded availability of commercial financing and active lenders will keep interest rates competitive.
Investors and small business owners should not buy into any negative hype that a rise in interest rates will slow down commercial financing or property sales. Any negative effect seen from the increase will be barely felt. More importantly, many of the commercial financing programs we offer at K2 Commercial Finance are designed to secure the lowest interest rates possible. For small business owners, SBA loan programs will continue to be one of the best commercial financing vehicles available and will continue to thrive no matter what interest rates do.