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The impact of interest rate increases on the CRE market

On Behalf of | Jan 12, 2016 | Commercial Real Estate

Many business leaders and investors in Kansas and around the country were unsurprised by the interest rate increase announced by the Federal Reserve on Dec. 16. A rate hike had been expected for some time, and it was widely reported that only a disappointing jobs report had prevented Janet Yellen from announcing the move in November. While the 25 basis point increase still leaves rates at near historic lows, some real estate experts predict that rates will continue to be adjusted upwards as the year unfolds.

While the Fed’s announcement may have been expected, it still came at a crucial time for the commercial property market. A huge tranche of mortgage-backed securities is scheduled to mature in the coming months, and many observers fear that borrowing could become far more difficult as the holders of these securities seek to avoid further rate increases. They worry that lenders spoiled for choice by a flood of refinancing applications will begin turning down loan applications that would have been eagerly approved just a few months ago.

However, other analysts say that modest rate increases could actually be a blessing in disguise. They feel that artificially low borrowing costs put into place to help the economy crawl out of recession have led to sloppy management practices and imprudent decision making. They point out that interest rate increases are a sign of a healthy economy, and they believe that the more responsible borrowing practices that rate hikes often usher in could well prevent another property bubble from forming.

The coming year is expected to be a busy one for commercial real estate as falling oil prices spark fears of deflation. This could make property investment an attractive option for individuals unfamiliar with the challenges of real estate speculation. An experienced real estate attorney can advise investors and developers about the legal problems that could develop.