Commercial Real Estate, Capital, Insurance, Leasing & Management

Wealth Management Real Estate: Will Rising Interest Rates Lead to a Valuation Decline for Commercial Real Estate?

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Below are experts from an article written by Franklin Street’s Nate Weyer, Senior Director of Capital Advisory, for Wealth Management Real Estate’s 2022 Midyear Outlook.

One of the biggest unknowns heading into the second half of 2022 and beyond is how the most recent and anticipated interest rate increases by the Fed will impact the commercial real estate sector.

To fully understand what the impact could be, it’s important to first look back on the last time the Fed significantly raised interest rates. During the period between June 2004 and 2006, rates went from 1.25 percent to 5.25 percent. The Fed’s goal was to curb inflation after experiencing a recovering and growing economy coming out of the Great Recession of the early 2000s.

The current question is how this will impact the commercial real estate sector in terms of both property valuations and investors’ ability to obtain financing. What we will see in the third quarter of 2022 will be a lot of discovery when it comes to real estate valuations and trades. In the near term, our capital experts at Franklin Street expect the bid/ask between property sellers and acquiring investors to become out of balance and
transaction activity to slow as compared to prior quarters.

Sellers will continue to believe their properties will command the same valuations they have seen prior to the recent interest rate increases, as demand continues to outpace supply. We can expect supply to remain limited due to continued material shortages, inflated construction
costs and labor disruption within the construction sector.

Although there is some uncertainty going forward, there is a tremendous amount of investment opportunity in the market. Investors who work with an experienced capital advisor will have an advantage while navigating this
period of inflation and rising interest rates.

Read the full article by Franklin Street’s Nate Weyer in Wealth Management Real Estate‘s 2022 Midyear Outlook.

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