Real Estate

Bigger Pockets: High Interest Rates Are Forcing Big-Time Investors to Cut Their Losses – Is a Bust Coming?

Interest rates went from historic lows to their highest level in 15 years in the span of 18 months. Meanwhile, hybrid and work-from-home trends changed how much office space companies need.

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  • As companies downside, commercial vacancies are on the rise. And some office buildings are selling at steep discounts to their last sale. That could be a sign of further stress ahead for commercial real estate. And investors may want to pick and choose carefully in the space.

    Rising interest rates are a bigger deal for commercial properties than for homeowners. While homeowners can lock in a rate for 30 years, commercial properties tend to be shorter.

    As a result, the payments behind many financed properties has soared. Combined with rising vacancies, and it’s likely there’s more downside ahead.

    Vacancy rates for commercial properties is now at 17%, higher than after the housing crash in 2008. A smaller business footprint also means lower revenues for cities, which means less services.

    Even worse, local and regional banks tend to hold a large amount of debt related to commercial properties. These companies could continue to struggle, and may see some steep drops in their share price.

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  • Further bank failures or shotgun mergers with stronger companies could be likely. And office-space-related investments such as REITS will also remain out of favor with the market for some time.

     

    To view the full analysis, click here.