How Interest Rates are Influencing the Commercial Real Estate Market
Arizona Escrow & Financial Corporation
Arizona’s largest independent escrow company specializing in Business Sales and Commercial Transactions
As we enter a period of economic adjustment, recent interest rate cuts by the Federal Reserve are set to reshape the commercial real estate market. After a series of rate hikes throughout 2022 and 2023, the Fed has now shifted course, beginning with a 50 basis point reduction in September.
What does this mean for businesses looking to expand or acquire properties?
In this month’s newsletter, we’ll explore the implications of lower interest rates, the factors shaping commercial real estate, and what lies ahead for investors navigating these dynamic conditions.
Anticipated Interest Rate Cuts
In September, the Federal Reserve reduced its benchmark interest rate by 50 basis points (0.5%), following 11 consecutive rate hikes that began in early 2022 and continued through the summer.
The newly reduced rates of 4.75% to 5% are aimed at stimulating economic growth, which could lead to lower borrowing costs for commercial property buyers and developers.
CBRE, the world’s leading commercial real estate services and investment firm, projects that the Federal Reserve will likely reduce the benchmark interest rate by another 50 basis points (0.5%) across two more meetings this year.?
Additional cuts of up to 1.5% in 2025 are anticipated, potentially lowering the Fed’s benchmark rate from the current level of approximately 5.38% to around 3.13% by the end of next year.
These cuts would create a more favorable borrowing environment for commercial real estate (CRE) investments.
How This Affects the Commercial Real Estate Market
Lower interest rates can have significant impacts on the commercial real estate market.?
These reductions make borrowing cheaper, which encourages investors to re-enter the market. Lower financing costs directly benefit developers and buyers, enabling them to secure loans for new projects or acquisitions at more favorable terms.?
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As borrowing becomes more affordable, CRE transaction volumes are expected to rise.?
CBRE models project 15-20% more commercial real estate transactions.
Phoenix has emerged as a national leader in industrial real estate development, with nearly 30 million square feet of new projects currently under construction and year-to-date deliveries already reaching 27.1 million square feet.
Lower interest rates could further fuel this growth by reducing borrowing costs for developers and investors and attracting businesses seeking to expand in the region.
What Lies Ahead?
Looking ahead, the commercial real estate market is poised for gradual recovery with the expectation that interest rates will continue to fall.
Don’t expect a flood of capital into the market. Instead, experts predict a more measured rise in investment activity as businesses adjust to the evolving economic landscape.
Ginger Chambless, Head of Research for Commercial Banking at JPMorgan Chase, notes, “It’s important to remember the easing cycle will take place over time, and any future cuts will be predicated on incoming data…If upside inflation risks continue to ebb as we expect, the pace of Fed cuts can be relatively brisk.”
Even with lower rates, commercial property values may not decline significantly due to high demand, especially in prime locations. Investors and businesses seeking to expand or acquire properties will still need to navigate competitive market conditions.
Are you navigating the changing commercial real estate market? Whether you are a buyer, seller, investor, lender, broker, or attorney, we’re here to help ensure your next deal closes smoothly and successfully. Reach out to learn more!
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