In less than the time it takes you to pay off a vehicle, the Federal Reserve has raised the key interest rate a sixth time. To make things even more interesting, consumers can expect at least three additional hikes over the next eight months. While you may not notice much of a difference in smaller, revolving credit accounts, you can expect to “feel the pain” if you’re a commercial real estate owner.
It’s about this time in commercial real estate ownership when property owners look at their building and shake their heads; it’s a buyers/lessee’s world. Capitalization (CAP) rates are up due to the increased FED rates, which means property owner risks follow suit. Good news, buyers and tenants! If you’re looking to purchase or lease property, NOW is a good time! As CAP rates rise, (typically) prices fall. Though an owner may not be happy, this shift in leverage means you, mister or miss buyer/tenant, are in business for a good deal… potentially.
Wait, potentially? Yes, potentially. As owners realize decreased property values, a tenant will likely feel the offset by way of pass through expenses or rental rate increases, assuming your market rate supports. Without a strong or consistent growth rate in net operating income (NOI), a property owner must offset risks associated with decreased property values. Similarly, property owners assume a certain level of risk with selling. However, buyers could experience a shortage in available sale properties, as some owners may choose to hang onto property until the market makes an uphill climb. Either way, this ebb and flow creates a dynamic and competitive real estate market.
So, to CAP it all off, what does this mean for YOU? Well, if you’re an investor, now is a good time to check out your local market and potentially diversify your portfolio by snagging a piece of the commercial real estate pie. Prices should begin to decrease a bit and a great opportunity could be right around the corner! If you’re looking to lease commercial space, you could be in luck, too! Property owners may offset their losses through a couple of pass through methods, but overall, you should start to see a decrease in rental rates and leasing opportunities. Of course, nothing is guaranteed, but for now, things are looking promising for buyers/tenants. As an owner, well, hang in there! Per usual, the real estate market is cyclical, which means one thing- you will bounce back! An ever-evolving government means an ever-evolving industry. Though growing (evolving) pains may make you cringe, it could be a great opportunity to secure new tenants and sell property you want/need to move quickly.