Surging interest rates ripple through California commercial projects
Oct. 31—Rising interest rates that have already slowed the local home market are now spreading to commercial real estate, where
A series of recent rate hikes driven by inflation fears at the
Several local investments have already fallen through as a result of that combination, said commercial property consultant and adviser
"If the rent of tenants doesn't go up" to compensate for income lost to higher interest payments, he said, "the project doesn't get built."
Construction costs generally weigh heavier on a project's balance sheet, Underhill and others said. The difference is that interest rate increases are the more recent phenomenon, arriving long after inflation began raising costs related to building materials and labor.
Sometimes the effect arrives mid-transaction, said Executive Director
"There's a psychological piece," Roche said. "A lot of investors just pause."
He added that the firm continues to negotiate with tenants lining up to lease space at the property that formerly housed the
Speculative projects are far more likely to slow as a result of rising interest rates than developments designed to serve a specific user, said Senior Vice President
That could pose a challenge locally in light of a recent surge in so-called "spec" developments taking place locally in industrial and office real estate. Such investments were rare until a couple of years ago, when strength in both classifications picked up during the pandemic.
Haupt said it remains to be seen how big a concern rising interest rates will become locally, adding, "I don't think it's going to affect any existing projects" under construction.
Executive Vice President
As the company works to finish its master-planned communities in southwest
Senior Vice President
A similar optimism prevails at local multifamily developer
"We believe the strong underlying demand for housing will be a much more significant driver of long-term cash flow and asset appreciation than any short-term arbitrage of interest rates by transactional buyers and seller," she wrote, adding that Sage intends to hold onto the projects it develops for at least 10 years before selling them.
Chief Operating Officer
"We think that buyers' interest will increase at a rapid pace once they see some stability in interest rates and their cost of living," Daughtery wrote. "In the meantime, we're working on creative solutions with our brokers and lenders to help the buyers get into houses now."
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