How Are Rising Interest Rates Impacting Commercial Real Estate?

Article by Jaspreet Bassi

To tackle inflation, the Bank of England has responded by raising interest rates. This article will consider how the rise in interest rates is affecting commercial real estate transactions. 

Higher Borrowing Costs and Lower Returns

Firstly, when interest rates increase, the cost of borrowing increases for investors and developers. This reduces the demand for executing commercial real estate transactions such as buying new property. The demand is reduced because the expenses for holding that property have increased, and this, in turn, will lower the return that the investor can expect from their investments. 

Property Values Decrease

Secondly, when interest rates rise, investors are less willing to pay high prices for commercial real estate assets, which decreases the value of the property. Consequently, the demand for real estate declines and prices decrease. 

The Impact on Law Firms

The above demonstrates that a rise in interest rates can reduce the demand for conducting certain types of commercial real estate transactions. By ‘certain types, ’ what is meant is that commercial real estate encompasses different asset classes, such as offices and industrial warehouses. Although interest rates have increased, some commercial real estate assets are still in high demand. For example, offices with high environmental credentials and amenities are in more demand compared to offices of poor quality. Furthermore, the rise in e-commerce has made industrial warehouses a popular commercial real estate asset. 

This will impact law firms that provide services in this sector. For example, law firms are likely to see more frequent types of transactions concerning particular types of assets than others. For instance, if a company occupies a building with low environmental credentials and has noticed that fewer workers are coming into the office, it may seek to renegotiate the length of the lease. Moreover, law firms may see regular transactions to buy or let industrial warehouses. 

To conclude, interest rate rises may result in law firms seeing a decrease in the number of commercial real estate transactions and, as a result, a decrease in revenue in that sector. However, it is important to note that there will still be certain types of commercial property that are in high demand and being transacted.