Interest rate hikes – impact on commercial real estate

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March 13, 2017

By: Christopher T. Roeder, International Director, JLL

“Mr Bond, they have a saying in Chicago: “Once is happenstance, twice is coincidence, the third time it’s enemy action.”  — Auric Goldfinger, (Goldfinger, Ian Fleming, Jonathan Cape, 1959)

Interest rates are rising. After two moves by the Fed to raise rates in the last decade, it seems highly likely we’ll see three rate hikes this year. The first may already be upon us as I write this post.

Now, no one likes to pay more for their money, but is this “enemy action”?  Not necessarily.

While rising interest rates can be a dampener on commercial real estate – think borrowing costs for developers and buyers – there could be beneficial effects in some markets.

The ups and downs of interest rates

Our own recent US Investment Outlook discusses the impact of anticipated rate hikes this year.

Other studies also point out that higher interest rates may not have a dampening effect on commercial real estate investment, although higher interest costs could affect cap rates for real estate investors – over the short term.

However, as some reports point out, interest rate hikes in the current environment are indicative of a strengthening economy. This bodes well for several sectors of commercial real estate, including the office market. Economic growth has been anemic in the last few years, but even so markets such as San Francisco have, at times, seen strong leasing activity. We might expect more rapid growth and corporate expansion to further fill up our office inventory.

Historic lows leave little room for cuts 

Remember, too, that we’ve had more than seven years of historically low interest rates.  With the Fed Funds rate at just three quarters of one percent, there isn’t much leeway for the central bank to cut interest rates to stimulate growth should the economy take a downward turn.  This scenario could be far worse for commercial real estate here in San Francisco than any rate hikes we experience this year.

About the author:

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Chris leads the 32-person JLL brokerage team in San Francisco and is a member of the company’s Executive Council and Leadership Council. His primary business is representing institutional landlords and tenants throughout the city’s 85 million square foot commercial office sector. Chris has been a top producing broker for JLL since joining the firm in 2007, averaging over 70 transactions and more than one million square feet of leasing per year.

 Contact Chris directly by phone at +1 (415) 395-4971 or via email at chris.roeder@am.jll.com.

 

 

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