The Impact of Changing Interest Rates in 2022
Interest rates are going up in 2022 and will have an impact on Commercial Real Estate decisions. Here is some information from Cresa on the possible impact on corporate properties and the impact to corporate users. If you would like to learn more, please contact me at 301-841-6542.
March 9, 2022
Fed Announcement
At the December meeting of the Federal Open Market
Committee, the Committee made announcements targeted at fighting inflation. The
imminent move is a monetary tightening policy in which the Fed will double the
pull back of its monthly bond buying from $30 billion to $15 billion. This will
conclude the tapering process in March, three months earlier than the
previously targeted month of June.
Following the Fed’s meeting in late January 2022, more
prognosticators and analysts believe the speed of rate hikes will accelerate,
to as much as four or five rate hikes in 2022. Historically, the Fed has
implemented rate hikes in 25bp increments.
The Federal Reserve will implement its first interest rate
hike in March 2022.
What This Means
These moves are targeted to get inflation back under control
and near the Fed’s long-term target of 2.00% annual inflation. The tapering of
bond buying reduces monetary supply while an increase in borrowing rates can
slow economic growth and trim asset values.
Most prognosticators believe the Fed’s moves, specifically
the anticipated rate hikes, will have the greatest impact on short-term
interest rates with less impact on long-term rates. From an overview
perspective rates remain in a historically low range. Accordingly, the yield
curve has “flattened” to bring short and long-term rates closer to each other.
Corporate Properties
For Corporate owners of real estate, the market values for
assets, particularly Industrial, remain near all-time highs. As Investors begin
to underwrite with higher cap rates you can expect some devaluing of these
assets as we come to the later half of 2022.
For companies who have higher costs of borrowing for direct
long-term debt (such as BBB and lower grades of debt), sale & leasebacks
are increasingly attractive on a comparative basis as a way to secure long-term
financing in this rising rate environment.
Key Takeaways
Impact to Corporate Users
Tenant Improvement dollars will not go as far as they have in the past and occupiers should be prepared to deploy more capital on improvement projects than they have historically. Additionally, escalations have been quickly rising with most lease deals starting negotiations at 4.00% - up significantly from the prior 2.5%-3% range. Investors in Industrial real estate are beginning to underwrite with slightly higher cap rates, particularly when evaluating transactions that may occur in Q3 or Q4 of this year.
Office Properties: This market has high uncertainty. Tenant’s should benefit from softer market conditions and landlords eager to generate income in their properties. While rental rates have dropped in secondary markets and class B/C products, class
A product rental rates are holding steady from a broad stroke view. However, concessions have been increasing across the board with free rent and Tenant Improvement Allowances exceeding pre-pandemic levels.
The number of office investors is currently substantially lower as many investors are on the sideline, waiting to see how this market shakes out. Investors in the office sector have begun underwriting with higher residual cap rates, and by a significantly greater margin than Industrial buyers.
End of Article
If you have significant questions about your current real
estate strategy, it may be time for a discussion. Once we have started our conversation, we can
create a strategy to look at your business operations and current space and then
craft up a plan to find something that is a great fit in the area. With the current vacancies and inventory, we
will work with you to get the best deal.
We represent tenants ONLY, so you can feel comfortable that we are
working for your business 100%. If we
can help you by being your tenant broker in the DC, Maryland, or Northern
Virginia area, visit my website or
call me at 301-841-6542. Make sure to
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I specialize in providing comprehensive real estate services,
exclusively representing corporate tenants on all commercial real estate needs.
Commercial Tenant Broker
2 Bethesda Metro Center, Suite 900
Bethesda, MD 20814
301-842-6542
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