The Federal Reserve Bank raised interest rates for the first time this year by a quarter of a percentage point on March 21st. If the Feds raise interest rates too aggressively in the next two years, the commercial real estate industry could stagnate. The higher the interest rates in commercial real estate, the deeper the industry will fall.
The “retail” real estate market is very sensitive compared to office and industrial real estate at this time. The continued shuttering of retail stores due to online retail is hurting the investor. The landlords have to repurpose the space to attract new types of businesses. The rise in interest rates can deter owners from remodeling, and sales will decrease leaving empty spaces for months or years. In addition, the empty spaces could bring property values and rental rates down with them.
New uses for the existing empty department and small retail stores in malls and on Main Streets is imperative to keep these investors above water. Consequently, higher interest rates will hinder landlords in their attempt to attract new entrepreneurs. The higher cost of borrowing money will be passed from the lessor to the lessee.
In addition, office space may also feel the effect of higher interest rates. Large corporations are leasing smaller office space due to more employees working remotely from home and the high cost of office space. Some company employees rarely go into the office anymore. Office space is expensive and the cost of remodeling space to fit the new office lifestyle is costly; as a result, higher interest rates may create a downturn in the office market creating high vacancy rates.
In contrast, higher interest rates may not affect the industrial real estate market. The vacancy rate for industrial space is currently at a record low. We are currently experiencing a shortage of industrial buildings. As a result, high interest rates may not affect these investors.
In my expert opinion increasing interest rates more than .75 basis points this year may hurt the commercial real estate investor.