How Will Inflation and Interest Rates Impact Commercial Real Estate This Year?



How Will Inflation and Interest Rates Impact Commercial Real Estate This Year?

How Will Inflation and Interest Rates Impact Commercial Real Estate This Year?

Let’s dive into projections about what is likely to happen with inflation and interest rates this year and how it will affect commercial real estate.

Rising inflation and interest rates

Austin continues to be a robust market for commercial real estate, meaning pricing will remain extremely competitive. As such, the ability to quickly secure lending could make the difference between winning a deal and losing a deal. With inflation still a major concern, commercial real estate investors in Austin should remain confident properties they acquire are on track to appreciate in value.

Rising inflation and interest rates certainly are a concern for commercial real estate professionals in the Austin area. However, those two economic trends shouldn’t be a great deterrent to commercial real estate deals this year in Central Texas. Why? In large part because Austin continues to rank among the top commercial real estate markets in the country.

Real estate platform CREXI identifies Austin as the No. 4 U.S. market for commercial real estate investment. A report from PwC and the Urban Land Institute also places Austin at No. 4. Meanwhile, investment platform Fortune Builders puts Austin at No. 7 among this year’s fastest-growing commercial real estate markets.

Regardless of inflation and interest rates mixed-use projects, Class A office space and industrial properties are likely to enjoy robust demand among Austin investors and tenants. According to Cushman & Wakefield, net absorption of office space in the Austin market returned to close to pre-pandemic levels and unprecedented demand for warehouse and distribution space continues in the region thanks to e-commerce and population growth.

Much of the positive buzz about Austin’s commercial real estate market stems from major developments such as Tesla’s new $1.1 billion auto manufacturing plant and headquarters near Austin-Bergstrom International Airport, Samsung’s planned $17 billion chipmaking plant near Taylor and Apple’s soon-to-open $1 billion campus in Northwest Austin.

The relationship between inflation and interest rates

In order to fully capitalize on the buzz, some commercial real estate investors might want to move sooner rather than later to purchase property in the Austin area. Rising interest rates could make commercial real estate deals more costly as the year progresses. In December, the U.S. inflation rate hit 7%, its highest mark since 1982.

To curb inflation, the Federal Reserve is expected to hike interest rates several times in 2022. Every rate hike will result in money becoming more expensive to borrow. As such, your clients might want to ramp up any plans they have to buy commercial real estate so they can capitalize on the lowest interest rates possible.

Austin’s economic prosperity

Fortunately, the Austin area’s thriving economy should help blunt any negative effects from rising inflation and interest rates. In November, the area’s unemployment rate stood at 3.2%, compared with 3.9% at the national level. Overall, the Austin area ranks second among the country’s metro areas for job growth during the pandemic, bested only by Salt Lake City.

“Austin’s economic prosperity, even in light of the pandemic, and wealth of diverse talent make it a red-hot frontrunner for real estate investors,” says CXRE, a Houston-based provider of commercial real estate services.

Helping drive job growth in the region is Amazon — job growth that promises to boost demand for industrial and office space in the Austin area. This, in turn, translates into opportunity for commercial real estate investors. In December, Amazon announced plans to add 2,000 tech jobs in Austin as the e-commerce giant keeps filling jobs at its regional warehouses and distribution centers.

“Our continued investment in Austin is a testament to the amazing talent and amenities that this city has to offer,” said Doug Gray, site lead for Amazon’s Austin Tech Hub. “With more than 3,000 jobs already created and more than 1,000 corporate and technology roles currently available, we’re looking forward to continue offering exciting career opportunities to local residents.”

What do rising inflation and interest rates mean?

Rising inflation and interest rates will loom over Austin’s commercial real estate market in 2022. However, it’s worth pointing out commercial real estate provides a healthier return on investment than traditional investments. Plus, as inflation goes up, property values and rents also go up.

This economic reality should give commercial real estate investors in Austin a leg up on higher inflation and interest rates. But as it relates to interest rates, the time to act is now when it comes to commercial real estate deals. That’s because looming hikes in interest rates promise to add thousands upon thousands of dollars to the cost of a property purchase.

Three key takeaways:

  • Impending hikes in interest rates mean investors should move sooner rather than later for commercial real estate opportunities.
  • Austin’s status as a red-hot market for commercial real estate promises to push up pricing, contributing to the urgency to close deals.
  • While rising inflation worries consumers, real estate investors may benefit due to appreciation in property values.

Now is not the time to sit on the sidelines when it comes to real estate deals. The longer a buyer waits, the more costly it could be to borrow money for a deal. What areas are you most excited about? Our team of local experts would love to talk. Call a local lender now. 

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