Rising Interest Rates

The economy is slowly getting better. This improvement in economic circumstances lend that jobs are being created. With the creation of jobs comes more people who need housing, and companies need more space. Washington, DC, commercial real estate market has been seeing improved statistics in all sectors, and multifamily housing is seeing an uptick as housing options for new workers are scarce. For this reason, income for Frank Haney (https://www.linkedin.com/company/franklin-haney-company) and other landlords of commercial real estate can expect an uptick as they can charge higher rents. DC, as goes most major metropolitan markets, is very short on supply of new buildings. The proverbial fly in the money-making ointment at this time, however, is the impending rise in the federal funds rates.

We are also on the precipice of a federal funds rate increase. This will, of course, have an inverse effect on property values as it raises the cost of money. If there is less capital available for investing, and that which is available is coming at a higher rate, this will affect both demand and supply. Money that is available comes at lower ratios to the overall intrinsic value of the property after a rate increase. Rate increases serve to tighten, in hopes that the Fed can head off inflation. Tightening always affects the values of properties relative to using said property as a means to create liquidity. It also makes less funds available.

Under these circumstances, commercial real estate might see an increase in property value, but where the real increase is going to be increased rental income. These increases will outperform increases in the value of the property, comparatively speaking. That being said, coastal markets in the United States, and especially in the capitol city, the values of properties are likely to remain very strong, although anticipating appreciable moves in value in a rising interest rate market are difficult to forecast.

The Washington, DC, commercial real estate market is one of our country’s most active markets. It is comprised of 120 million square feet, with nearly 40 million square feet, or one-third, are in the Capitol Building and East End districts. Our government attracts a significant number of residents, a certain number of which are temporary, to the capitol. That being said, there is a pool of vacancies that are constantly refreshed by this transient nature. For that reason, it might be one of the most vibrant commercial real estate markets in our country, and certainly one that warrants looking into for investment options.