Rising Interest Rates & the Commercial Property Market

The commercial property market is a complex and ever-evolving landscape that can be affected by a wide range of factors, including interest rates. With the Reserve Bank of Australia (RBA) having recently announced yet another increase in the cash rate, it is important for commercial property investors to understand how these changes can affect their investments. In this blog, we will explore the impact of rising interest rates on the commercial property market, with a particular focus on the Central Coast region of New South Wales.

An Overview of the Commercial Property Market

The commercial property market can be broadly defined as the buying, selling, and leasing of office, retail, and industrial properties. These properties are typically owned by private investors, developers, or corporate entities such as companies and trusts. The commercial property market is a key driver of economic growth, as it provides businesses with locations to operate from, and provides investors with the opportunity to generate returns from their investments.

The commercial property market is very dependent on the economic climate. When the economy is strong and businesses are expanding, demand for commercial property typically increases, resulting in higher property prices. Conversely, when the economy is weak and businesses are contracting, demand for commercial property decreases, often resulting in lower property prices. Most commonly, economic conditions are dynamic, resulting in growth for some industry sectors and contraction for others, which has a balancing effect overall, but also creates nuance in markets. Interest rates also play an important role in the commercial property market, as higher interest rates can make it more difficult for businesses to secure financing and can also reduce the affordability of properties for investors.

How Rising Interest Rates Can Affect the Commercial Property Market

Interest rates are one of the most influential economic factors that can affect the commercial
property market. When the RBA increases the cash rate, it can have a number of impacts on
the commercial property market.

Firstly, higher interest rates can make it more difficult for businesses to secure financing for their investments, as they will have to pay more in interest charges. This can reduce the demand for commercial property, as businesses may not be able to afford the higher costs associated with financing their investments.

Higher interest rates can also have an impact on the affordability of properties for investors. With higher interest rates, investors may be less willing to take on additional debt, as the cost of servicing the debt will be higher. This can reduce the demand for commercial property, as investors may not be able to afford the higher costs associated with investing in property.

Finally, higher interest rates can also affect the value of existing commercial properties. As the cost of financing increases, investors may be less willing to pay top dollar for properties, resulting in a decrease in property values. This can be particularly problematic for investors who are looking to offload their investments, as they may not be able to realise the returns that they were expecting

Trends in the Commercial Property Market on the Central Coast

The Central Coast region of New South Wales is home to a vibrant and diverse commercial property market. The region is well-known for its picturesque beaches and coastal lifestyle, which make it an attractive location for businesses and investors. The commercial property market in the Central Coast has seen a steady increase in demand in recent years, with investors attracted to the area due to its strong economic growth and good returns on investments.

The Central Coast commercial property market has been resilient in the face of rising interest rates, with investors continuing to take advantage of the attractive investment opportunities available in the region. Despite the recent increase in interest rates, the demand for commercial properties in the Central Coast has remained strong, indicating that investors are still confident in the region’s economic prospects. As interest rates continue to rise, it will be interesting to watch how this trend continues and what impact the increased
cost of money has on our market.

General Impact of Rising Interest Rates on Property Values

The impact on property values by rising interest rates is something that will vary across different property markets, both by geography and by sector within the industry (eg; residential, commercial etc). The impact is largely a result of what demand is in the market for any of these sectors. For example, if there is an oversupply in the residential (or commercial) sector, thereby outweighing the demand, then higher interest rates will mean buyers act more slowly and want better value for their dollar. Conversely, if there is a shortage of supply of commercial (or residential) property on the market, then demand is likely to outweigh availability and therefore limit the impact of rising interest rates, as buyers will need to act quickly or risk missing out.

It is also important for investors to remain mindful of the potential impact of rising interest rates on their investment properties, as this could help them to identify potential risks before they become unmanageable issue. For example, if an investor is planning to invest in a property in a market that is likely to be affected by rising interest rates, they may want to consider investing in a different property or market where the impact of interest rates is likely to be less significant.

Strategies for Managing Risk in a Rising Interest Rate Environment

It is essential that investors know and understand what risks are associated with investing in commercial property, and to ensure they have a plan and strategy for how to manage these risks. In an environment of increasing interest rates, one important strategy to manage your risk would be to diversify your property portfolio. This means investing in a range of different properties and property sectors, as well as in different property markets. You can apply the same strategy to diversify your overall investment portfolio by investing in different asset classes, not just property. This will help you to reduce the risk that any one particular investment could have a catastrophic impact on your overall portfolio.

If you are investing in a property that is likely to be affected by rising interest rates, it is important to have a strategy in place to manage the potential risk, such as investing in longer-term investments, such as multi-year leases, in order to protect yourself from potential fluctuations in the market (i.e. so you’re not forced to sell if you have a property with a vacancy that you cannot afford to hold on to).

Conclusion

The commercial property market is a complex and ever-evolving landscape, and it is important for investors to understand how changes in the economy can affect their investments. In this blog, we have explored the impact of rising interest rates on the commercial property market, with our normal focus on the Central Coast market.

We have discussed how higher interest rates can make it more difficult for businesses to secure financing, and can also reduce the affordability of properties for investors. We have also discussed the trends in the Central Coast commercial property market, and strategies for managing risk in a rising interest rate environment.

It is important for investors to be aware of the potential risks associated with investing in commercial property, and to have strategies in place to manage those risks. By understanding the impact of rising interest rates on the commercial property market, investors can make informed decisions about their investments and can ensure that their investments are well-positioned to weather any potential market fluctuations.

Resources
Reserve Bank of Australia: https://www.rba.gov.au/
Investopedia: https://www.investopedia.com/
CoreLogic: https://www.corelogic.com.au/
Real Estate Institute of New South Wales: https://www.reinsw.com.au/
Real Estate Institute of Australia: https://www.reia.com.au/
Central Coast Council: https://www.centralcoast.nsw.gov.au/