If you’re involved in commercial property, whether as an investor, business owner, or developer, you know that the market is affected by the larger economy. Key factors like interest rates, Gross Domestic Product (GDP), and inflation can have a big impact on the value of commercial properties, how much rent can be charged, and whether it’s a good time to buy, sell, or develop.
Our Commercial Manager Leigh Doherty has over 25 years of experience in commercial properties on the South Coast. He explains how economic indicators can influence commercial real estate.
Interest Rates: The Cost of Borrowing Money
Interest rates affect how expensive it is to borrow money. This can change how people and businesses behave when it comes to buying or developing commercial properties.
Impact on Borrowing Costs
When interest rates go up, loans become more expensive. This can slow down the market because fewer people want to buy or invest in commercial properties when borrowing is costly.
On the other hand, when interest rates are low, borrowing money is cheaper, so more people and businesses are willing to invest in commercial real estate. Low rates encourage new developments and purchases because the financing is more affordable.
How They Affect Property Values
Interest rates also affect the value of properties. When rates are high, property values often go down because the cost to finance these properties increases. Investors want to make sure they can still get a good return, so they’re less willing to pay high prices. When rates are low, property values tend to go up because it’s easier to get a loan.
Impact on Rent
Higher interest rates don’t just affect buyers – they can also affect businesses that rent commercial spaces. If borrowing is more expensive for businesses, they may cut back on expanding or upgrading, which can lead to less demand for office spaces or retail locations. When demand drops, rents tend to fall, too. When rates are low, businesses are more likely to expand, increasing demand for space and allowing landlords to charge higher rents.
GDP: The Economy’s Overall Health
Gross Domestic Product (GDP) measures the size of a country’s economy. When GDP is growing, the economy is doing well, and when GDP shrinks, the economy is struggling. This plays a big role in commercial property.
How GDP Growth Increases Demand for Space
When the economy is growing, businesses are doing well. They might be expanding, hiring more people, and needing more office or retail space. This drives up demand for commercial properties, making it easier for landlords to fill vacancies and even charge higher rents.
Impact During Economic Slowdowns
If the economy slows down or enters a recession, businesses may cut back on spending or downsize, which means less demand for commercial properties. Higher vacancies and lower rents often follow, as there are fewer businesses needing space.
Retail spaces are particularly sensitive to this, as people tend to spend less during tough economic times, and businesses need less space when sales are down.
Inflation: Rising Prices and Its Effects
Inflation is when prices for goods and services go up over time. It affects commercial real estate in a few ways, both good and bad.
How Inflation Affects Rents
One of the upsides of inflation for landlords is that many commercial leases are linked to inflation rates. This means that as prices in the economy rise, landlords can increase rents. So, if inflation is high, landlords can typically charge higher rents to keep up with rising costs.
However, inflation can also strain businesses that lease commercial spaces. If their own costs are rising (for goods, wages, etc.), they may struggle to pay higher rents. This could lead to more vacancies or even lease defaults, where tenants can’t pay their rent.
Impact on Construction Costs
Inflation doesn’t just affect rents; it also impacts the cost of building new properties. When inflation is high, the cost of materials and labour goes up, making new construction projects more expensive. This might slow down new developments because the higher costs can eat into profit margins.
Link Between Inflation and Interest Rates
High inflation often leads to higher interest rates, as banks try to control rising prices. And as we discussed earlier, higher interest rates make borrowing more expensive, which can slow down activity in the commercial real estate market.
Economic indicators like interest rates, GDP, and inflation are key to understanding the commercial property market. When interest rates are low, it’s easier to buy or develop properties, but when they’re high, things slow down.
GDP growth leads to more demand for commercial space, while economic slowdowns mean less demand and lower rents. Inflation can help landlords raise rents but can also increase the costs of building new properties and lead to higher interest rates.
For anyone in the commercial property market, keeping an eye on these factors can help you make smarter decisions, whether you’re investing in new properties, leasing space, or developing projects. The key is understanding how these economic shifts may affect both short-term opportunities and long-term trends.