How Interest Rates Impact Commercial Property Values
Anyone with experience in commercial real estate or the building industry, especially in Salem and the Mid-Valley, has lived through some rocky times. Monitoring economic and political trends and trying to predict the direction interest rates will go is a critical part of the job. These rates significantly influence property values.
Historically, interest rates have fluctuated dramatically. In the late 70s and early 80s, interest rates skyrocketed. This made it extremely expensive to buy commercial property. Eventually, the rate normalized, but it served as a reminder of the unpredictability and fickle nature of the economy.
Back in the 1980s, the rise in interest rates was so dramatic that it quickly had a big impact on commercial property values. When rates almost double in five months, this creates market insecurity. After all, why would you purchase expensive commercial properties when there is a chance that the interest rate will rise or fall significantly?
Some commercial property types are more sensitive than others to these changes. Net lease properties (where a tenant pays a fixed monthly rent and some or all of the property expenses) are more affected.
Fortunately, the current interest rate has been changing slowly and moderately causing a less pronounced impact on property values. The decline of the prime interest rate in the 80s continued for decades, exerting its own positive impact on the current real estate market.
The economy and the overall demand for commercial real estate comes into play in this environment. When demand is strong (and property values are rising), investors will still want to buy commercial properties. This is the case even when interest rates are rising.
However, in a real estate market where activity has been cooling down, and where people don’t believe that they’ll get the same level of appreciation if they buy, any upward move in interest rates can further reduce their desire to buy. This discourages the “less than serious” investor.
Lower interest rates can help stimulate people to buy property. Higher interest rates can remove people’s interest in buying, or at the minimum, this can then cause them to demand lower prices. They are all related.
When watching the trends for the perfect time to buy, sell or expand your business, make sure to work with qualified professionals who are keeping on top of interest rate changes.