How Is Industrial Real Estate Today?
The rapid rise of interest rates is putting downward pressure on asset values and adds to development costs. Income is reduced when borrowers need to pay higher interest rates. Either prices drop or owners add value to improve their returns. Not all property classes are affected equally. During times of economic uncertainty there is a flight to quality. Tenants will pay for higher ceilings, better loading, and truck courts, especially at close-in locations. Older buildings see reduced demand but because many of those property owners have a low basis, they can often reduce rents and still maintain a steady income.
Sale prices are on the decline, but not as much as you would think. Users, who have been shut out of the market by investors for so long, want to purchase their own building. Many users are wealthy and if they can justify a mortgage payment instead of rent, they are incentivized to purchase. This puts a healthy bottom on how far prices can fall. In fact, it resembles a more functioning market, before the era of negative interest rates, where users would typically pay more than investors. In the broad history of finance, 6% or 7% money is not unreasonable. However, it’s the suddenness and rapidity of the rate moves that is disruptive.
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