How do commercial real estate investors make money in a rate-rising environment? 

real estate agents discussing potential factors

The commercial real estate market may look quite intimidating to investors right now. The cost of building materials remains historically high, interest rates have risen from their historical lows, and inflation has quickly swept through seemingly every aspect of business and society. The assumption would be that investors should pile up cash and put it on ice until conditions are more stable and more favorable. But that assumption would be wrong for most. Here is why: 

  1. Current market conditions can make it easier to get a discount 
  1. Current market conditions can remove other buyers (competition) 
  1. Higher payments are temporary 

Short-term and long-term commercial real estate investments 

Commercial real estate investors looking to buy properties, hold for two years or less, and then sell for profit may be the most likely group to be negatively impacted by current market conditions. Property values surged in 2021 and have continued climbing in 2022. The outlook beyond 2022 is cloudy. Speculation over what property values will do over the next two years varies. Property values could climb higher, but there could also be a retraction on the horizon. 

For commercial real estate investors looking to make long-term investments, the current market conditions should have little impact on decisions. In times like this it can be more difficult to acquire capital, and it will cost more to acquire capital, but the opportunity to make money in a rate-rising environment is still there. 

Cash flow on commercial real estate investments 

One impact on the decision to make a commercial real estate investment is cash flow. Straight cash flow deals (where property improvements will not be required) will either work or they won’t work. It is just a matter of running the numbers. Property values and interest rates have risen, but so have rents. Commercial real estate is a stable asset and as long as the cash flow works, the investment makes sense. This thought process is the same no matter what is happening in the market, and it will not matter if it is a short-term or long-term investment.  

Forced appreciation on commercial real estate investments 

Buying assets that allow you to force appreciation is preferred in a rate-rising environment. When you have the opportunity to make physical property improvements, improve operations, or improve cash flows (by renegotiating rents with tenants, for example) you can force appreciation of the asset. Forced appreciation helps to absorb or offset the cost of higher interest rates. 

Know your numbers to make smart commercial real estate investments 

Any smart investor will know their numbers to determine if a deal will or will not work. What ROI are you looking for? What timeframe do you have to work with? If this is an investment you plan to keep for 5-7 years or more, you can be sure that rates will go up and down by 2027. Run a stress test on your deal – if rates were to hit “X%” would my deal work? When will this deal not pencil? 

Commercial real estate market forecasts for 2022 

Most financial markets forecasts show interest rates continuing to rise over the next year. Likewise, most commercial real estate forecasts show property values and rents continuing to rise over the next year (read this recent article from the National Association of Realtors blog for a good example). Making money on commercial real estate in a rate-rising environment (especially our current environment) should still be the expectation. 

Lincoln James Capital can help you find and secure CRE financing with the best terms 

If you have commercial real estate investment opportunities, Lincoln James Capital can help get your deal done. We have extensive market knowledge and can help you make confident decisions. We have a large database of lenders who offer great rates. Keep in mind, we don’t make more money from higher rates. We get paid to get our clients the loans they need with the best terms (which is not always the best rate) so they can close their deals and continue to build their business and increase wealth. 

Want to go deeper on the topic? We created an in-depth analysis that includes… 

👉🏽 The recent history of the U.S. Treasury 

👉🏽 How to identify profitable properties 

👉🏽 How to “stress test” investment options 

👉🏽 Advantages of working with an experienced commercial lender 

Read more in our featured article… 

“Rates Are on the Rise. How Investors Can Position Themselves for Long-Term Success.”


More Posts