During 2019, experts had predicted a rise in interest rates. However, rates actually fell due to actions by the Fed. What does the rate drop mean for commercial real estate in Massachusetts? Although no one can predict the future, here are a few on the impact of reduced interest rates on commercial real estate in Massachusetts, based on past trends.
Cap Rates and Sale Prices
Generally speaking, when interest rates fall, commercial real estate prices rise. This occurs for two reasons. First, cap rates are an important consideration for real estate investments. Most investors have a certain number of basis points that they would accept between the interest rate and cap rate. Logically, when interest rates fall, a lower cap rate is acceptable since the spread between the two remains the same. Thus, more properties become viable options for investors despite a lower cap rate.
Secondly, reduced interest rates make commercial real estate investments more appealing. Increased demand for properties will naturally drive up sales price. This is particularly true for properties with long-term leases set when rates were higher. Landlords can benefit from high lease rates while also taking advantage of low interest rates, leading to larger profit margins.
Another factor worth noting in this discussion is the decreasing inventory in commercial markets across the country. With construction prices on the rise (due to rising material costs from tariffs, increased labor costs, and increased municipal contributions for new developments), new construction projects are expected to slow down. Investors will therefore need to consider existing inventory, for which there may not be a huge abundance. This too drives up commercial real estate prices.
More on the Impact of Reduced Interest Rates on Commercial Real Estate in Massachusetts
Contact ABG Realty for a snapshot of the current market. We can provide information on available inventory and pricing trends for commercial real estate in Massachusetts. Our team will help you evaluate opportunities and select a property that meets your investment goals. Contact us today to schedule a consultation.