Six Critical Questions Part 2: What Impact Will Interest Rates Have on Commercial Real Estate?
This article is part two of a six-part series focusing on the most critical questions about development and commercial property in Southwest Florida. The volume of commercial real estate transactions in Southwest Florida decelerated over the last year, likely attributable to number of factors. These variables include escalating construction costs, scarcity of land for development, increasing insurance premiums, and growing interest rates. Yet, despite this slowdown in commercial sales velocity, prices are still on the rise. This brings us to the second critical question in our six-part series: What Impact will Interest Rates Have on Southwest Florida Commercial Real Estate? Undoubtedly, interest rates have a visible influence on the commercial real estate investment market. Elevated interest rates mean a hike in the cost of borrowing money and can ultimately dampen demand from developers and investors. Interest Rates and Treasury Yields Commercial mortgage rates are typically based on the 10-year treasury. Treasury yields peaked at 4.92 percent in October 2023 and currently hover at about 4.3 percent, roughly 80 basis points higher than we saw last April. Such rates can pose hurdles for properties that can’t generate enough cash flow to support high-leverage mortgages. Fortunately, rent growth should soften the impact of pricier borrowing costs on balance sheets. The Federal Reserve Bank escalated interest rates 11 times in 2022 and 2023 to counteract skyrocketing inflation. Since inflation began to stabilize in mid-2023, the Fed has left rates unchanged in six of its last seven sessions. Currently, the U.S. inflation rate stands at 3.2 percent, and although the Fed disappointed many by announcing that it’s unlikely to reduce interest rates in the immediate future, experts still anticipate at least one rate cut before the end of the year. More Interest Rate Stability Coming We anticipate much more stability in interest rates from this point forward. As a result, property values in our region are poised for marginal growth, thanks to low inventory and high rent potential. However, we shouldn’t expect to see sales volume rebound to previous levels for another year to 18 months. Are you prepared to take advantage once interest rates begin to fall? Whether you’re a property owner looking to position your asset for sale or a potential buyer seeking opportunities in our marketplace, the Commercial Property Experts at Cushman & Wakefield | Commercial Property Southwest Florida (CPSWFL) have the data, analytics, and local experience to assist you with your needs. Complete our online contact form or call CPSWFL at 239-489-3600 today to speak with one of our experts.
