How High Interest Rates Impact Commercial Real Estate
High interest rate environments can have a significant impact on the commercial real estate market.
After all, most investors utilize leverage to increase their returns and an increase in borrowing costs makes that leverage more expensive for developers and investors, which decreases potential returns and, therefore, demand for new projects.
Here’s how high interest rates impact the commercial real estate market.
Investor Demand Slows
When interest rates rise, it becomes more expensive for investors to borrow money to build or purchase properties. This increase almost certainly leads to a slowdown in the construction and development of new properties because developers may become hesitant to take on the added financial burden and project risk that higher interest rates bring.
Additionally, high interest rates also make it more expensive for investors to borrow money to acquire new assets, which leads to a slowdown on that front, too. Think about it - all things being equal, every dollar returns less in a deal when your debt payments are more expensive.
So, that leads to….
Decreasing Property Values
Investors have a specific yield or cash on cash return target that they need to hit when they’re investing in commercial properties.
If interest rates increase, the only other lever that can be pulled for them to hit those returns is a decrease in property values. There is typically less demand for properties because of these increased borrowing costs, fewer new properties going under construction, and fewer buyers competing on these deals, causing a shift from a seller’s market to a buyer’s market.
Those buyers that are able to work with these challenges can find opportunities with sellers seeking to exit their deals in the short-term and negotiate better sales prices.
The way we’re looking at it, see if the deal can make sense with where interest rates are today and plan for a refinance as soon as your borrowing costs come down.
That doesn’t mean you should overextend yourself with the hope that interest rates will decrease, because you don’t want to put yourself into a bad position, but there could be some good opportunities there.
Focus on Cash Flow and The Fundamentals
To help mitigate any potential negative impact on your investments from high interest rates, you may want to focus on properties that generate more stable cash flow, such as properties that are leased to creditworthy tenants or are at higher cap rates and can cover that interest rate spread.
It’s also best to consider properties located in markets with stronger economic fundamentals, as these areas tend to be more resilient to market swings and downturns.
As a commercial real estate investor, it’s important that you keep an eye on the overall economic climate and interest rate projections from the Federal Reserve. If it seems like interest rates are expected to remain high for an extended period of time, it can shift how you underwrite these deals to generate your returns. Many investors tend to underwrite based on the previous twelve months instead of the last ten years, which can give you a skewed view of how the market should perform.
Don’t forget that commercial real estate is a long-term game and you’ll be able to weather these short-term fluctuations.
Commercial Property Investments Depend on Interest Rates
Interest rates have a significant impact on commercial real estate markets, whether they’re high or low.
When interest rates are higher, investors can expect to see slower growth fundamentals and potentially lower property values during these times due to decreased cash flow opportunities.
However, by being intentional about acquiring properties that generate stable cash flow and are located in markets with strong economic fundamentals (which you can find here from Urban Land Institute), you may be able to mitigate any potential negative effects, at least in the short-term, of increased debt service.
If you’ve been investing for a while, you know the grind.
You’ve closed deals, managed contractors, worked through leases, and seen both wins and setbacks. Maybe you’ve owned single-family rentals, a few duplexes, or even some small commercial buildings. You understand the fundamentals: how to run numbers, navigate debt, and keep properties occupied.
But here’s a question that hits at a different level: are your investments giving you leverage or just more responsibility?
As your portfolio grows, so does the complexity. More tenants often mean more phone calls. Bigger buildings bring additional systems, staff, and liability. And while your equity might be growing on paper, your time can get stretched thin across too many directions.
That’s why more experienced investors are quietly shifting toward asset classes that offer something rare in commercial real estate: simplicity that still delivers strong returns.
Two of the most overlooked categories in this space are flex industrial and industrial outdoor storage (IOS).
They’re not flashy. You won’t find them in luxury investor decks or high-end brochures. But these properties produce solid returns, attract long-term tenants, and are surprisingly light on operational headaches. Best of all, they give seasoned investors a way to keep growing without being consumed by the demands of their portfolio.
In this post, we’ll walk through:
What makes flex and IOS so attractive
The numbers behind why they work
How they fit into a growing portfolio
And why they might be the most strategic asset class you haven’t explored yet
This is not about going bigger for the sake of scale. It’s about going smarter.
Because the goal is not more units. It’s more freedom.