5 Considerations for Investing in Commercial Real Estate When Interest Rates are High

by | Apr 16, 2023 | CRE Education

When interest rates rise, purchasing commercial real estate can be a smart investment strategy, but it’s important to take certain tactics into consideration. Here are some tips to help you navigate the market:

1. Consider Shorter-Term Financing

Financing Caspian Group
When interest rates are rising, there are several financing options that can be considered. While traditional fixed-rate mortgages may not be the most ideal choice, shorter-term financing options can provide some flexibility for investors. Adjustable-rate mortgages (ARMs) or balloon mortgages are two types of loans that can be considered.

ARMs are mortgages with variable interest rates that are adjusted periodically based on market conditions. With an ARM, borrowers can benefit from lower interest rates than traditional fixed-rate mortgages, which can lead to lower monthly payments. However, the interest rate can also increase, which means that monthly payments can also increase.

A balloon mortgage is a type of mortgage that has a fixed interest rate for a short period, typically five to seven years, after which the remaining balance is due in one lump sum payment. Balloon mortgages usually have lower interest rates than traditional fixed-rate mortgages, but borrowers are required to pay off the remaining balance at the end of the term, which can be a significant expense.

Both ARMs and balloon mortgages have their advantages and disadvantages, and it’s important to carefully consider all options before making a decision. While these financing options may provide some flexibility for investors, they also come with risks, so it’s important to have a solid financial plan in place before taking on any debt.

2. Look for Undervalued Properties

Undervalued Properties Caspian Group
During periods of rising interest rates, some commercial properties may become undervalued as investors become more cautious. This can create opportunities for savvy investors to purchase properties at a discount. In addition, during these periods, it is important to consider the current economic conditions and the long-term prospects for the property. A thorough analysis of the property’s potential cash flow and the strength of the local real estate market can help investors make informed decisions. Another consideration is the potential for future development or improvements to the property, which can increase its value over time. It is also important to carefully review any existing leases or contracts related to the property, as these can impact its value and potential profitability. Overall, while periods of rising interest rates can present challenges for commercial property investors, they can also offer opportunities for those who are willing to carefully evaluate the market and make strategic investments.

3. Focus on Cash Flow

Commercial Real Estate Cash Flow Caspian Group
When interest rates are rising, it’s important to focus on properties that generate strong cash flow. This will help ensure that you can continue to make mortgage payments and cover other expenses, even if interest rates continue to rise. Additionally, it’s important to consider properties that have a history of appreciating in value, as this can help offset any potential losses due to rising interest rates. Another factor to consider is the location of the property, as certain areas may be more resilient to interest rate increases than others. It may also be wise to explore alternative financing options, such as adjustable-rate mortgages or shorter loan terms, to help mitigate the impact of rising interest rates. Lastly, it’s important to stay informed and keep a close eye on market trends, as this can help you make informed decisions and adapt your strategy as needed.

4. Hedge Against Inflation

Hedge against inflation Caspian Group
Commercial real estate can be a smart investment choice for those looking to hedge against inflation. As inflation rises, so do rents and property values, making commercial real estate an attractive option for investors. However, it is crucial to carefully select properties in markets with strong job growth and economic fundamentals to maximize your investment returns. Additionally, consider diversifying your portfolio by investing in different types of commercial properties, such as office buildings, retail spaces, and industrial warehouses. This can help mitigate risks and ensure long-term profitability. Furthermore, staying up-to-date on market trends and economic developments can help you make informed decisions and stay ahead of the curve in the commercial real estate game.

5. Consider Working with a Professional

Marshall Nguyen Caspian Group Vice President
Investing in commercial real estate can be complex, particularly during periods of rising interest rates. The increase in interest rates can have a significant impact on property owners and investors, causing a decrease in property values and a decrease in overall investment returns. However, there are several tactics that you can follow to increase your chances of success when investing in commercial real estate during periods of rising interest rates.

One of the most important tactics is to work with a professional, such as a real estate agent or broker, to help you navigate the market and make informed investment decisions. A professional can provide you with valuable insights into the market, including information about property values, market trends, and investment opportunities. They can also help you identify potential risks and provide guidance on how to mitigate those risks.

Another important tactic is to diversify your investments. Investing in a variety of properties can help reduce your risk and increase your chances of success. This can include investing in different types of commercial real estate, such as office buildings, retail spaces, and industrial properties.

It’s also important to do your research and carefully evaluate your options before making any investment decisions. This includes conducting a thorough analysis of the property, including its location, condition, and potential for growth. You should also consider the financial aspects of the investment, including the potential return on investment and the risks associated with the investment.

By following these tactics, you can increase your chances of success when investing in commercial real estate during periods of rising interest rates. However, it’s important to remember that investing in commercial real estate is a long-term commitment and requires careful planning and analysis. With the help of a professional and careful consideration of your options, you can make informed investment decisions that can lead to long-term success.

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