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By: Frank Knopers
Rising interest rates are having an effect on the real estate market worldwide, including commercial real estate. In April, commercial real estate sales in the United States fell to $39.4 billion, down 16% year-over-year. This decline is in stark contrast to the upward trend over the past thirteen months. At that time, the transaction volume was on average twice as high each month as one year previously. In March, for example, commercial real estate sales were still 57% higher than in the same month last year. Rising interest rates and uncertainty about the economy are the main causes.
Commercial real estate includes buildings that are not used as living space, but that have a commercial function. Think of retail premises, restaurants, hotels and office buildings. Due to the extremely low interest rates and pent-up demand after the corona pandemic, there was a lot of demand for these types of properties, but due to the rise in mortgage rates, new projects have now become less profitable. As a result, some investors drop out, because the interest costs are much higher. Uncertain economic prospects have also made banks more reluctant to lend money.
Due to low interest rates, it has been very lucrative to invest in real estate in recent years. After all, rental income was much higher than interest charges. For investors, this means an attractive return and relatively little risk for banks that provide the money. But with interest rates much higher and high inflation eroding household purchasing power, investors have become more cautious. In the United States, mortgage rates have doubled to 5% in less than a year, making some projects unprofitable. In some cases, buyers drop out at the last minute, even if they lose their deposit as a result. "Two to three years ago, that didn't happen", real estate agent Joshua Campbell told the Wall Street Journal.
This newspaper cites Innovo Property Group, a real estate developer in New York, as an example. This real estate developer abandoned the purchase of an $855 million office building in Manhattan at the last minute. Due to higher interest rates, financing was no longer attractive. As a result, she lost the $35 million deposit. Other investors also sometimes have to make the trade-off between paying a much higher interest rate or calling off the deal and losing the deposit. Investors have therefore also become more cautious about signing new contracts.
The price development of commercial real estate is an early indicator of sentiment in the entire real estate market, as this sector has direct exposure to changes in the economic environment. As soon as consumers keep their hands on the purse strings, shops and restaurants will immediately notice the consequences. The market for residential real estate reacts much less quickly to this, because a decline in consumer spending only leads to more bankruptcies and rising unemployment in the longer term. As long as households are sure of their income, there will continue to be a demand for housing. This explains why house prices and rents are still rising, albeit at a slightly slower pace than six months ago.
In the Netherlands, the rise in mortgage rates is already having an effect on the real estate market. The NVM streak Earlier this year, a report reported that more homes were put up for sale in the last weeks of March. Compared to the previous quarter, this was an increase of 10%, while the number of viewings is decreasing, according to Makelaarsland. Houses also stay on the market a little longer. Most homes are still selling above the asking price, but the overbidding has already decreased. Due to the higher interest rates, potential buyers can borrow less and the monthly costs increase. As a result, buyers are also becoming more cautious about bidding. If the economic outlook does not improve in the coming months, there could be a turnaround in the housing market. We will continue to monitor this development closely.
This contribution comes from Geotrendlines
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