Rising interest rates could soon send Capital Region real estate deals back to the drawing board.
The Federal Reserve is expected to raise rates today by 75 basis points–or 0.75%–the largest bump at a single meeting since 1994.
“There’s no doubt it’s going to put quite a few projects on hold,” says Mark Hebert with Kurz & Hebert Commercial Real Estate. “At least until you can understand the numbers.”
At least through May, the volume of commercial real estate sales—including multifamily, industrial, retail and office—was well ahead of recent historical norms for East Baton Rouge Parish. Only land transactions, down 10.47% by number of transactions and 4.68% by dollar volume, had slipped below the average for the previous seven years, according to a report Elifin Realty compiled.
“Activity is off the charts,” says Elifin CEO Mathew Laborde.
Laborde suggests rising rates are affecting larger markets sooner than in the Capital Region because profit margins in those highly competitive markets are tighter and more sensitive to interest rate fluctuations.
Evan Scroggs with NAI/Latter & Blum says he hasn’t seen high interest rates kill any deals yet. He says the typical rate of return on real estate deals has been shrinking for at least 12 years, but now that money isn’t as cheap to borrow, a higher expected return will be necessary to justify pulling the trigger.
“It’s a headwind that’s going to become more problematic,” Scroggs says. “I think there’s going to be a recalibration of sorts, in terms of value and underwriting and what it takes for projects to make sense economically.”
