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Rising Interest Rates Slowing Down Commercial Deals

Despite the COVID-19 pandemic grinding markets into a halt, commercial property sales were boosted by demand for multifamily and industrial properties through 2021 and into this year. The growth of these property types offset the negative impact on property markets generated by underperforming office buildings, many of which continue to be empty as many businesses have shifted to remote work. From March 2021 to March 2022, commercial property sales had increased by 57 percent. But some observers question if the offset rise in commercial sales has run its course as that growth was arrested by a 16 percent drop in sales last April.

After rebounding from the pandemic buying slump as investors took advantage of lowered interest rates, property sales are beginning to sink. Last month, sales of hotels, office complexes, senior housing, and industrial assets all dropped significantly. Retail property sales increased in April, marking the fourth month in a row that Americans increased their spending, while apartment building sales increased due to robust tenant demand and landlords’ ability to hike rents. However, analysts and brokers say that activity in these industries may be stalling as interest rates rise, discouraging some investors from making competitive offers. 

Interest rates have certainly ballooned this year. The yield on 10-year Treasury notes, a common benchmark for commercial mortgages, has nearly doubled in 2022. The rise in borrowing costs has caused some investors to realize that their near-term rate of return is lower than the interest rate on their mortgage, meaning that investors who purchased buildings with large amounts of cheap debt are beginning to exit the market. A narrowing buyer pool could spur more concessions from sellers to entice sales, prompting more deals in the short-term. But, that bump in sales will not last long as less buyers will be able to afford properties thanks to the increased cost of borrowing.

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