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Commercial real estate and increasing interest rates

On Behalf of | Apr 11, 2017 | Commercial Real Estate

Missouri commercial real estate investors and developers likely know that the Federal Reserve raised interest rates in March 2017. It was the third interest rate increase since December 2015, and it appears that there will two additional rate increases in 2017. While interest rate hikes usually indicate a stronger economy, this may not necessarily be the case right now. The Fed’s chair has gone on record saying that she only expects moderate growth in coming years.

However, a survey of over 100 heads of business conducted by Business Roundtable found that the economic outlook saw its biggest increase since 2009. According to the National Federation of Independent Business, optimism among small business owners was at its highest levels 1974. Generally, stronger economic growth means more demand for real estate. It may also mean more money for lenders, but reforms made in the wake of the Great Recession may mean that lenders don’t realize the full potential of the current upswing.

When interest rates rise, it can make borrowing more expensive, which may act as a restraint on the market. Those who currently own property may be more likely to refinance their current mortgages before rates go any higher. Currently, the base rate is at a range between .75 and 1 percent.

Developers of commercial property may want to consult with legal counsel before embarking on a new project. As there are many regulatory pressures on the banks that have high exposure to real estate loans, it might be wise to explore alternative sources of financing. An attorney can review the terms of a proposed loan to ensure that there are no provisions that could be problematic down the road.