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Opinion: Seizing commercial real estate opportunities amid higher rates

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With interest rates garnering so much attention nationwide, it’s easy to think that it’s not a good time to shop for new space or property for your small business. But that’s the nature of commerce – there’s opportunity in everything. Even now.

It’s true that today’s environment makes it challenging to buy good, cash-flowing real estate. To curb inflation, the Federal Reserve has raised interest rates 475 basis points the past 12 months, and it’s possible it will increase another 25 basis points in May.

But this doesn’t mean there aren’t great properties full of potential. It just means buyers will need to work more diligently and consider new perspectives they may not have given much thought before.

High rates in the short term
When it comes to financial planning for your small business, consider high interest rates a short-term cost. Through refinancing options or careful term planning, the interest rate you get now may not last for long. The more important consideration is that building and development costs are cheaper now than they were during the pandemic, and this is a permanent cost.

Some small-business owners put off building their cash-flowing real estate in 2020 and 2021 due to the historically high building costs, but now that these costs are coming down, it may be time to move forward.

Although short-term interest rates are very high, long-term interest rates are very reasonable right now. On the other hand, instead of trying to lock in long-term fixed rates, think about a loan with a shorter term and a quicker reset. This would allow buyers to take advantage more quickly when rates start to come down again.

Consider the nontraditional
Another option to mitigate the current interest rate environment, depending on the type of investment you are doing, is a little less popular but worth exploring. It’s called a swap agreement.

A swap is where the borrower gets a fixed rate, and the bank gets a floating rate. These rates are currently 100-225 points under The Wall Street Journal prime rate. Put simply, it allows for a greater deal of stability, while traditional financing leans heavily on flexibility.

Although current rates might be higher, borrowers might benefit in the long term if they can wait it out and pounce when the prime rate goes down again.

There are restrictions and limitations on these types of loans, so thoroughly discussing them with your banker before making any permanent decisions is always advisable.

If a swap doesn’t sound right, then consider something as simple as a higher down payment. Instead of the conventional 20% down payment, this might be the time to put 25%-35% down to help improve the property’s cash flow, which might create better terms from the bank, as well.

All about teamwork
Like any great team, it’s important to have trusted advisers on your side to help you make these tricky decisions. Your team should include a knowledgeable broker to help you find the best deals, a reliable and trustworthy commercial lender to help evaluate potential properties, an insurance agent that is at the ready, builders and developers with solid reputations, and a management company that is engaged and capable of meeting your occupancy and capacity needs.

Today’s economic environment has made things more difficult than they’ve been in the past, but buyers and investors that are strategic and patient can still find solid projects with attractive financing deals to go with them.

Nothing can beat a little persistence and ingenuity, not even interest rates.

Scott Speight is a senior vice president and commercial lender for OMB Bank in Springfield. He can be reached at s.speight@oldmobank.com.

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