Interest Rates On Commercial Real Estate Increasing, Pros and Cons Explained

The Federal Reserve has increased the interest rate by a quarter point to a range of 0.25 to 0.5 percent for the first time in almost a decade and mortgage applications have dropped down to a dramatic 25 percent in the last two weeks. What effect does the interest rate hike have on the current and future commercial real estate?

Forbes' Ely Razin presented a primer on the rising interest rates and the commercial real estate (CRE), examining first the prospective disadvantages and then the potential benefits. Analyzing these things are not as easy at it may seems as there will be other economic factors that would be affected by the interest rate hike and in a direct or indirect way, it will affect CRE.

What may further complicate things pertaining to the Feds hike is the impending "maturity wall" of the commercial mortgage-backed securities which means it needs to be refinanced in the next couple of years Razin continues. It simply means that these existing mortgage contracts would have to be refinanced because the borrowers' loans are maturing and more so, the interest rate increase may even push borrowers to look and opt for refinancing sooner than they have anticipated.

Now, the existing rate remains low and the recent hike is also relatively low and may not be felt to have a massive effect but the main concern at the moment is that subsequent hikes are also expected for the next year.

In relation to this, Lynn Fisher, Mortgage Bankers Association's vice president of research and economics, according to a CNBC report, says, "Refinance application volume increased for three weeks in a row in early December ahead of the Fed's announcement that it was raising the federal funds rate. During the two weeks following their announcement, holiday-adjusted refinance activity dropped substantially, even though the 30-year fixed rate increased by only 4 basis points over the same period."