Steady Interest Rates For CREs
As interest rates increase or fall, they impact a variety of aspects of the economy. From finance to real estate, a lot of companies pay special care to the shifts in the rates of the Federal Funds (the Fed Rate).
Therefore, as the Federal Reserve issues decisions on rate fluctuations, consumers listen carefully as these changes will have a significant effect on commercial real estate interest rates.
In 2019, the Fed announced that weakening economic growth in Q1 forced them to put an end to interest rate increases for the year, while also announcing that they could approve one rate rise in 2020.
Nonetheless, following their Q4 meeting, officials suggested that the prices will stay unchanged and that no significant action is likely to be taken in the next year due to low inflation.
The unemployment rate dropped to a 50-year low in 2019 and is projected to decline lower in 2020, but corporate activity and consumer consumption remains below normal. In addition, the Fed hopes that keeping interest rates stable would encourage “full employment and market stability.”
The Way Lower Interest Rates Impact Commercial Real Estate
Any individual, company or organization that borrows money will benefit from a lack of rate rises or decreases. Specifically for real estate owners, as interest rates stay small, this also results in expanded investment opportunities. If the cost of borrowing capital stays low or even goes down more, borrowers continue to become more interested in taking advantage of financial savings.
For example, an investor who has previously passed on an opportunity to invest in an office building in Houston can rethink the move. As a result, lower interest rates positively impact real estate prices, increasing them as investors pour their cash into commercial assets. In the end, low interest rates mean that the office building industry will begin to rise in value in 2020.
Relationship Between Interest Rate and Cap Rate
The capitalization limit, generally referred to as the “Cap Rate,” is the projected yield on investment properties. The ceiling rate is determined by calculating the net operating income (NOI) of the land by the present market value. As a statistical model, it looks like this :
capitalization rate = net operating income / current market valuation
When interest rates rise, investors pay more to borrow money. As a result, this pushes up the prices of commercial property, because investing more on borrowing capital due to rising interest rates decreases net income.
Some investors fear that increasing interest rates would inflate cap rates, decrease property prices and, as a result, decrease returns. However, this is an oversimplification of the situation.
Usually, we assume that the cap rate will deteriorate as interest rates increase. The value of a commercial office building asset may decline by 5% with every .25% rise by the Federal Reserve.
On the other hand, low interest rates for commercial real estate do not automatically yield attractive cap rates. The truth is that other considerations also influence the cap limit.
Historically, interest rates are not the only factor impacting commercial real estate efficiency. While there is a link between interest rates and cap rates, it is not as similar as some might think.
Thus, steady Fed rates during 2020 imply a more reliable demand for CRE buyers and reasonable cap levels, without the volatility created by Fed rates rising or dropping.
Shop Around for Low-Interest Commercial Real Estate Loans
Interest rates on commercial mortgages range from loan to loan and product to product. Because commercial real estate transactions require extremely large loans, investors must look around at the right deals.
Investors do have a variety of different forms of loans to select from for their commercial real estate projects. Loans to CRE investors include:
- Standard mortgages
- SBA (Small Business Administration) loans, and
- USDA (United States Department of Agriculture) loans.
In addition, there are also building loans for ground-up buildings and Fannie Mae Apartment Loans or Freddie Mac Apartment Loans for multi-family homes. Any loan you want, be sure to do your research and make comparisons.
Whichever loan you pick, make sure to do your homework by reviewing the choices to find the right one and the right cost for your investment.
Why Now is the Perfect Time to Purchase Commercial Real Estate
The Fed’s low interest rate is expected to turn into rising office building prices for the Texas market over the course of 2020. Moreover, low interest rates for commercial real estate mean that 2020 is transforming into a fantastic year for commercial real estate investors.
Take advantage of reliably low-rate loans by investing today, and fund your property with substantial gains over the past few years.