What are rising interest rates doing to commercial real estate across Victoria?

The city of Victoria has been experiencing unprecedented growth, which has led to a need for more sophisticated commercial real estate solutions.

With Axis Property, we continually strive to exceed the expectations of our clients so that we may satisfy their real estate needs. Whether you need an office, retail, or industrial space, our licensed professionals have the knowledge and experience you need for success.

Rising interest rates positively impact the property market and the commercial real estate industry. Due to this, the commercial real estate investment in Victoria is expected to continue to grow in 2022.

The CBRE report indicates signs of optimism returning to the Victoria commercial real estate market with the rise in the interest rate. Also, the industrial, office and retail properties and multi-family housing suggest high demand, and a return to normal is on the way.

A higher interest rate generally indicates an improving economy. A stronger economy also leads to a more lucrative real estate market. Thus, business leaders are confident that the Victorian economy will be on the upswing in the coming years. There is no guarantee, however, that the two will be correlated.

With that being said, more people will be able to obtain the funds to invest in commercial real estate, and commercial real estate lending companies will be able to provide more financing options for investors.

The cap rate, the ratio of net operating income to market value, is the most important factor affecting commercial real estate pricing. According to this formula, higher interest rates lead to higher cap rates, reducing property values. However, this relationship is stronger when comparing longer periods. Ultimately, cap rates are influenced by capital flows, investor risk and interest, and real estate fundamentals.

An increase in interest rates is increasing the price of mortgages too. Consequently, real estate purchases increase for consumers. This leads to a decrease in demand for real estate. In turn, the market suffers. Therefore, sellers reduce property prices to lure buyers.

The main benefit of this oversupply of properties is that commercial property prices are likely to drop. First-time commercial property buyers can take advantage of this if they have adequately cushioned their loans against cash flow risks. An interest rate increase could contribute to easing the commercial real estate affordability crisis in the coming year.

Furthermore, because prices are rising, and labour and products are hard to find, new developments may be delayed or not happen as they should. When there is a shortage of industrial property, new competition entering the market may cause prices to rise. This would result in additional rental income for the landlord.

When it comes to commercial real estate, a low cash rate would no longer positively impact valuations. The cash rate can be used as an indicator of the Australian economy. If it starts to hover closer to zero, that would indicate that key economic indicators are suffering – productivity, wages growth and GDP. These factors influence activity and value in real estate markets, including commercial markets.

Whether your portfolio is local, extends beyond Victoria, or you simply want to understand how commercial real estate trends may affect your strategy. We can help. We offer a fresh new blended approach to learning if you’re looking to become qualified in the real estate industry or upskill your existing qualifications in the field. Please contact us today to learn more about our fresh new blended approach.