How Quickly Are Rates Rising and What Are The Impacts?

After last year’s rapid rise in property valuations to all-time highs, the commercial real estate market is experiencing one major change through the first four months of this year: rising interest rates. The Fed has been raising interest rates this year in the attempt to rein in inflation. Although interest rates are still historically low, the cost of capital for owner-user properties has increased 60% in just the last six months and has nearly doubled since the start of 2021.

Below is a snapshot of how quickly rates are rising:

November 2021:         2.92%

December 2021:         3.02%

January 2022:           3.21%

February 2022:           3.59%

March 2022:           3.92%

April 2022:            4.68%

May 2022:          5.12%

In our previous article, we outlined how rising rates impact the monthly expenses for purchases, both for investors and owner-users utilizing SBA financing. Another way to see the impact of rising rates is below:

3% Interest Rate on a $2,500,000 Loan

Monthly Payment:                      $11,855.28

Interest paid in year one:            $74,067.38

Interest paid in years 1-5:            $348,953.90

5% Interest Rate on a $2,500,000 Loan

Monthly Payment:                      $14,614.75

Interest paid in year one:            $123,829.34

Interest paid in years 1-5:            $591,389.83

5% Interest Rate on a $2,500,000 Loan

Monthly Payment:                      $17,669.48

Interest paid in year one:            $173,788.42

Interest paid in years 1-5:            $839,222.62

All of us are feeling the impact of inflation in our daily lives, from the price of gas to the price of food. For business owners, they are also trying to absorb rising wages, increased cost of materials, and the rising costs of real estate (both to lease and own). Record low interest rates, along with limited inventory, have driven the rapid appreciation of property values over the last 2 years. We can see in the above example how rising interest rates could have an impact on the price investors and business owners are willing to pay for buildings.

In a rapidly changing environment, we are here to be your commercial real estate advisor and provide you with the most relevant market data to help you plan your long term real estate and legacy wealth goals. If you would like our team to put together a complimentary property valuation package for you or if you would like to discuss the current state of the market, feel free to reach out at (858)458-3361 or ajize@voitco.com.