In the world of commercial real estate, timing is often everything. As long as inflation is still persistent — and above the Federal Reserve’s 2% goal — interest rates will remain elevated. In fact, after months of cooling inflation actually ticked back up in July. And the benchmark interest rate now sits at a 22-year high.
Many business owners and potential investors may be tempted to hold off on purchasing commercial property until rates drop. However, in some cases, waiting for lower interest rates might not be the best strategy. In this article, we’ll explore why it can make sense to purchase business and investment commercial real estate today, even in the face of high interest rates.
1. Locking in Rates Before They Go Higher
Interest rates are cyclical, and history has shown that they tend to fluctuate. Waiting for lower interest rates might mean missing the current opportunity to lock in rates before they rise even further. By purchasing commercial real estate now, investors can secure financing at today’s rates, protecting themselves from potentially higher rates in the future.
2. The Continual Escalation of Land and Construction Costs.
In our booming Central Texas market well situated, entitled and permitted commercial land parcels with all services are becoming an increasingly scarce and expensive asset. City, County and State regulations and permitting requirements are continually exacting a higher cost thus ensuring that a suitable developed land parcel today will never be less expensive in the future. Commercial Construction costs today are approximately 20-25% higher than they were just 3 short years ago and we see these costs increasing at a pace far above core inflation in the foreseeable future. Waiting for interest rates to drop 1-2% may present you with a vastly higher purchase price in a very short time span.
3. Rising Rents and Property Values
One of the significant advantages of investing in commercial real estate today is the potential for rising rents and property values. Despite higher interest rates, the demand for commercial space continues to grow, driven by factors such as population growth, urbanization, and economic expansion. As demand increases, so do rents and property values. Investing now allows investors to capitalize on these trends and benefit from the property’s appreciation over time.
4. Inflation Hedge
Commercial real estate is often considered an effective hedge against inflation. Inflation tends to erode the purchasing power of money over time. However, real estate is a tangible asset that tends to increase in value as inflation rises. By investing in commercial real estate now, investors can protect their wealth from the effects of inflation and potentially benefit from the rising value of the property.
5. Cash Flow Potential
Investing in commercial real estate today, even with high interest rates, can generate positive cash flow. While higher interest rates may mean higher borrowing costs, they also often coincide with a strong economy. A strong economy typically translates to higher rents and increased occupancy rates, leading to greater cash flow for property owners.
6. Tax Benefits
Commercial real estate offers several tax benefits that can make purchasing property today an attractive option. Investors can take advantage of deductions such as depreciation, mortgage interest, property taxes, and operating expenses. These tax benefits can help offset the impact of higher interest rates, making the investment more financially viable in the long run.
7. Limited Supply
In many markets, the supply of commercial real estate is limited, especially in prime locations. Waiting for interest rates to drop may mean missing out on the opportunity to secure a desirable property in a desirable location. By acting now, investors can position themselves ahead of competitors and secure valuable assets in high-demand areas.
8. Diversification of Investment Portfolio
Commercial real estate offers business owners and investors an opportunity to diversify their investment portfolios. Diversification is essential for reducing risk and maximizing returns. By including commercial real estate in their investment portfolio, investors can spread their risk across different asset classes, potentially providing more stable returns over the long term.
9. Availability of Financing Options
Despite the higher interest rates, there are still plenty of financing options available for commercial real estate investors. Lenders are competing for borrowers, offering a variety of loan products to meet different investment needs. Additionally, many lenders are willing to negotiate loan terms, such as interest rates and repayment periods, providing investors with the flexibility they need to make purchasing decisions now.
10. Refinance Later
Keep in mind that if the interest rates go down, you can refinance. If your potential purchase makes financial sense for your current business or investment needs in today’s high rate environment, then it’s going to be extra sweet when you refinance in the future.
11. Capitalizing on Market Opportunities
The commercial real estate market is constantly evolving, presenting investors with a range of opportunities. By purchasing property now, investors can take advantage of favorable market conditions and position themselves for long-term success. Waiting for interest rates to drop might mean missing out on these opportunities and having to compete in a more saturated market later on.
12. Long-Term Investment Strategy
Investing in commercial real estate is often a long-term strategy. While interest rates may be higher now, they are likely to fluctuate over the life of the investment. By taking a long-term view, investors can focus on the potential income and appreciation of the property rather than short-term fluctuations in interest rates.
In conclusion, while high interest rates may give some investors pause, there are several compelling reasons to purchase commercial real estate today.
By locking in rates before they rise further, investors can benefit from rising rents and property values, hedge against inflation, generate positive cash flow, and take advantage of tax benefits. Additionally, purchasing now allows investors to diversify their investment portfolios, capitalize on market opportunities, and take a long-term view of their investments. Ultimately, the decision to purchase commercial real estate today, despite high interest rates, can be a wise one, providing investors with the opportunity to build wealth and achieve their financial goals.