What You Need to Know: Federal Interest Rates and Industrial Real Estate

The Federal Reserve System (also known as the Federal Reserve or simply the Fed) has maintained its target interest rate of 0.25% to 0.5% for the past several years. However, with the recent economic recovery, the central bank has begun increasing the interest rates. The Fed’s latest interest rate increase brought the federal funds rate to a range of 4.75% to 5%, the highest level since September 2007. This has caused a significant stir in the construction and real estate sectors.

First and foremost, an increase in interest rates could lead to a decrease in demand for construction financing. This will primarily affect the commercial real estate sector, as many businesses opt to lease rather than purchase their properties. With higher interest rates, lenders may increase their lending standards, thereby making it more challenging for developers to secure financing for new projects.

On the other hand, the real estate industry as a whole could benefit from higher interest rates due to increased inflation. Inflation refers to an increase in the overall cost of living. As the interest rates increase, the cost of borrowing goes up, which reduces the amount of money available for spending. This leads to a reduction in the supply of goods and services, and prices begin to rise.

While this may sound counterintuitive, inflation can be beneficial for the commercial real estate investor. As prices for goods and services rise, so do commercial property values, rental rates and lease renewals. We have found this is especially true for industrial properties in the Reno-Sparks market. However, it's important to note that investing in commercial property is not without its risks. Increased interest rates could lead to an increase in defaults on existing commercial loans, which would ultimately lead to a decrease in property values.

The risks of investing in commercial real estate aside, the benefits can be significant. For example, commercial real estate can provide a steady source of income through rents, and in some cases, tax benefits. Additionally, commercial real estate has the potential for capital appreciation, which can increase the overall return on investment.

It's important to keep in mind that the decision to invest in commercial real estate should be made after careful consideration of the risks and benefits. Investors must consider factors such as market conditions, demographic trends, and economic factors before taking the plunge. Moreover, with the uncertainty caused by the pandemic, a cautious approach is highly recommended.

The increase in interest rates will have significant implications for the commercial real estate industry. Investors will need to weigh the risks and benefits of investing in this sector carefully. However, with proper research, patience and a long-term investment horizon, investing in commercial properties could lead to significant returns.