Commercial Real Estate News / Investing / Are Commercial Real Estate Interest Rates Overdue for an Increase?

Are Commercial Real Estate Interest Rates Overdue for an Increase?

Published: 11-15-21 Category: Investing

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

We’ve thrown around the term post-pandemic in a few articles here on the site, and it’s probably a good time to step back and explain. Indeed, we prefer to use the term post-pandemic based on several market trends. One, people show through their actions that they want to go back to normal. Football games, concerts, restaurants, amusement parks, and even bars are all experiencing heavy demand.

Even the CDC has cut the official quarantine period from ten days down to five days. Things are looking up, which means investors have new opportunities to seize. Of course, you’re probably not Daddy Warbucks. This brings us back to commercial real estate interest rates.

There’s always market variance when it comes to loans, and mortgage loans are no different. But there is good news here.

No Sign of Sharp Increases (Yet)

From our observations, there is no signal across the board indicating a massive hike in interest rates is on the horizon. That’s great news for investors looking to take advantage of post-pandemic trends. We’re leaning bullish on the market recovering, as the demand for experiences, services, and goods is higher than ever.

Sure, DoorDash and Amazon have made it commonplace to click a button and receive stuff, but that doesn’t mean that Joe Public wants to hide at home and just get "stuff." To truly experience the best life has to offer, the average American wants to go outside and see it firsthand.

Investors nervous about the interest rates should take comfort in the reality of commercial mortgages. The interest rate isn’t the only characteristic in play.

Step back and think about this from a different point of view. Commercial real estate is an income-generating asset. So, if you already see a property that’s generating income, your lender is also taking that into consideration. This is a far different conversation than the one surrounding residential properties.

The Term Sheet Is King (Again)

Getting into a commercial mortgage is risky on both sides. You have to weigh your side of the deal but think about the lender as well. They have to consider whether to give you money on a project that might crash. The market is fickle.

Remember Montgomery Ward? Sears? JCPenney? Once upon a time, we all thought these companies were too big to fail. The Internet proved us wrong.

This is where term sheets really make a difference. They are similar to the weight of preapproval in the residential real estate world. They come into play after the lender has examined your financial picture, including credit and cash flow figures.

From there, they can build a term sheet that breaks down everything you need to know about the loan. The old chestnut that knowledge is power is truly a cornerstone of the commercial real estate world.

Moving Beyond Interest Rates for a Winning Portfolio

If we look back at the worst commercial real estate transactions we’ve ever made, the biggest mistake becomes pretty obvious: we got so hung up on commercial real estate rates that we didn’t think about the bigger picture.

Do you have a bigger picture of your real estate portfolio? Are you considering all angles when it comes to not just right now, but ten years from now? What kind of commercial real estate investor do you dream of becoming? And most importantly, do you have a real roadmap to get there?

Your portfolio is a reflection of your strategic vision, your hopes, your dreams, and your goals. Don’t lose sight of your goals getting bogged down in interest rates and other pressing numbers. We aren’t saying numbers aren’t important, but it is possible to get so worked up about interest rates that you stay out of the market. And that doesn’t help your mission.

Reducing Interest Rates

OK, we’ll level with you: we can say "don’t worry about interest rates" all day long because we aren’t building your portfolio. You’re building your portfolio. So at this point, you probably want to skip to learning about reducing those interest rates.

Indeed, there’s a widespread in the market based on borrower risk. So if you’re working on reducing the interest rates you’re seeing, here’s what you need to consider:

Co-signers matter. If you’re bringing in someone else, this is a chance for the lender to spread the risk against two (or more) people.
Bigger down payments. You’ll want to have some cash reserves, but you might be able to offer up more cash or signal the presence of other money sources in order to bring the interest down.
Ask for less money. You’ll have to get the rest of the money you need from other sources, but this move can lower your interest rate and payments.
Work on cash flow. The better you look on paper, the more likely it is that you’ll not only get the loan, but you’ll also get a great interest rate.

The important point here is to ensure that you are giving enough documentation to make the lender feel comfortable about doing business with you. The nature of the CRE world is that you aren’t doing one-off deals with lenders. You’re building relationships with banks and lenders across the spectrum so that when it’s time to do a deal, you’re a known entity.

Looking Beyond the Horizon

No one has a crystal ball to predict the future, and the entire real estate world is fickle. Between Congress putting in new laws all the time and local governments, it’s hard to know what’s really coming down the pipeline. We could be completely wrong about the "post-pandemic" era, but from our initial observations, it doesn’t seem like the demand for services is slowing down.

By becoming a savvy and future-focused investor, you put yourself in a position to capture plenty of the market, one deal at a time. As long as you stick to the fundamentals and ensure that you keep your own goals in mind, you have the best chances of growing your portfolio to new heights.

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