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.
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.
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.