June 21, 2022
What does a rising interest rate environment mean for a buyer or seller of commercial real estate? The Fed has risen the fed funds rate once again. This time a 75-basis point raise. Inevitability as interest rates rise, affordability decreases, which means prices adjust downward. However, the size of these price adjustments depends on factors such as the asset type, location, class, and performance. There are many large buyers looking for commercial real estate that are not as dependent on commercial financing and will not be as affected by this environment. These types of buyers are generally looking for prime assets in high growth markets. The high demand for these types of assets will lead to less value destruction.
So, what do you do if you are a buyer? If you are currently under contract utilizing financing, you need to consider reducing your leverage or renegotiating a lower price to accommodate. However, before attempting to ask for a price reduction you need to consider the demand for the asset you are buying. If demand is high, you might not have a lot of power to get the price reduction you need.
If you are a seller, you need to understand the financing the buyer is seeking if any and be prepared for them to ask for price reductions.
If you are looking to buy or sell, please reach out to us today to see how we can help you!
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