Rising interest rates

How do rising interest rates affect commercial real estate? Rising interest rates are profoundly changing the commercial real estate landscape.

December 19, 2023

As borrowing costs rise, investors are facing a more expensive market and tighter financing conditions.

Tenant companies, meanwhile, are seeing their charges rise, as these costs are passed on by lessors. Faced with these economic challenges, a strategic, agile approach is essential.

Reducing demand and adjusting rents

Rising interest rates have a direct impact on demand for commercial real estate. Indeed, companies are more reluctant to commit to new acquisitions or sign new leases, as the cost of credit has become higher.

This slowdown particularly affects sectors such as office property and retail, which are more sensitive to these fluctuations. The logistics sector, on the other hand, seems to be holding up better, buoyed by the continuing growth of e-commerce.

At the same time, rising interest rates are leading to a readjustment in rents. In high-demand areas, rents continue to rise, while in less attractive sectors, landlords sometimes have to adjust their expectations to attract new tenants.

Development project delays and adaptation strategies

Rising interest rates are also having an impact on real estate development projects. Access to financing is becoming more restrictive, and many developers are forced to delay certain projects or revise their profitability targets downwards.

The valuation of real estate assets may also be revised, as investors now factor higher financing costs into their calculations. For tenant companies, this translates into a reassessment of space requirements, with an increased tendency to look for more flexible solutions, such as shorter leases or shared space.

Faced with this new situation, investors need to diversify their assets and explore alternative financing methods to reduce their exposure to risks linked to interest rate fluctuations. In this context, an agile, well-thought-out strategy is essential to secure investments and control costs.