Constant talk about fluctuating interest rates has taken the world of residential real estate by storm. Currently, people who want to buy a house are rejoicing that prices are coming down. Those looking to sell are preoccupied with how to maximize the value of their home in a slowing market. And, of course, changing interest rates always raise concerns about housing affordability and whether or not you can qualify for financing. But how will commercial real estate be affected?
Commercial properties typically involve much higher dollar amounts, and interest rates can definitely have an impact. However, many people don’t realize that even though rates have changed, they are still relatively low compared with the 20-year average.
It’s Business as Usual in the Commercial Sector
As of December 7, 2022, the policy interest rate is now 4.25%, although the banks will add a percentage point or two when approving mortgage loans. When you compare this to the .25% rate in early 2022, it seems high.
But compare today’s rate to the 20-year average, and it’s a different story. The rate averaged out to 5.78% from 1990 to 2022. In 1991, the rate reached an unprecedented high of 16%. Today’s rate is low by comparison!
However, regardless of the rate, people will always need and want to purchase goods and services, and will always need access to housing, whether renting or buying. Fluctuating interest rates will never change that, which is fantastic news for commercial developers and investors.
Changing Interest Rates Bring Exceptional Opportunities
Any disadvantage brought on by varying interest rates is always temporary because they are so fluid. Today, they remain lower than the historical average. Depending on the economy and inflation, the Bank of Canada may impose yet another increase. However, it is inevitable that the rates will eventually decrease again.
In the meantime, there’s no denying the opportunities in store for the right investor. When interest rates rise, there is significant downward pressure on real estate prices.
The monthly carrying costs of a loan may be slightly higher for the time being. But you always have the option of refinancing later when rates fall again.
The real advantage in the commercial market today is that you need far less for your down payment. To buy a commercial property, you can need as much as 20% to 50% upfront, depending on your risk profile.
Significantly lower prices can allow you to buy into a commercial building that would have been out of reach even one year ago.
Finding Success in a Changing Market
Some aspects of commercial real estate investing will always be beyond your control. No one can predict with certainty what will happen to the economy, particularly when we are so affected by what happens elsewhere in the world. The secret to succeeding is to focus on what you can control and always have a backup plan for when the unexpected happens. What can you do to maximize your odds of success regardless of which way the market goes?
Stay Informed
Even when disaster strikes, there are opportunities for investors who remain calm and stay informed of current trends and events. You don’t have to look any further than the Coronavirus pandemic to see that this is true. Many businesses suffered from the lockdowns, and some never recovered. On the other hand, many companies thrived, and it wasn’t just those offering essential services that enjoyed record profits.
Restaurants offering takeout and delivery, cleaning services, healthcare services, and technology companies are just a few industries that came through stronger on the other side. What does this mean for you as an investor?
Focus on Obtaining High-Value Clients
Investing in a commercial building is no small feat, and finding the ideal tenant is critical to your endeavour. A client who thrives on a challenge, has a financial cushion, and an acute business acumen is the gold standard you should strive for. Why? That type of company will pivot when necessary and survive and thrive even through tough economic situations.
Once they get established, they will also want to stay in your building for the long term, which means you’ll enjoy a stream of reliable rental income. Finding and vetting tenants can be tricky, but a real estate agent with commercial experience can guide you through the process.
Find a Prime Location
Ask any investor what it takes to succeed in commercial real estate, and you’ll hear the familiar chant, “location, location, location.” For a brick-and-mortar business, the right location is everything.
When analyzing potential listings, you’ll want to look not just at who might want to rent the space from you. Think of who would do business with your tenant. Does the local demographic support a thriving company? If you make every other mistake in the book, getting the location right could still mean enjoying a profitable investment.
Understand the Numbers
Fluctuating interest rates are a fact of life, and savvy commercial investors will always work them into the equation and be prepared no matter what. But interest rates are only one aspect of your investment. To succeed, you must understand all of the numbers, including:
- Purchase costs vs potential yields
- Cost of repairs and maintenance
- Vacancy costs
- Capital gains
- Commercial property taxes
- Utilities and insurance
- Property management fees
These concepts may seem intimidating, but working with a professional financial team will help ensure a potential investment is promising before you commit.
