In July, U.S. payrolls increased to 528,000, well above an estimated 250,000, and the unemployment rate declined slightly to 3.5%. These strong economic indicators have pundits speculating that more will have to be done by the Fed to slow the economy. Many economists expect another increase of .75 basis points in September, while the Fed may signal an additional .75 basis points toward the end of the year. Speculation on whether we are in a recession, or about to enter a recession, have many wondering where the needle will point in the next few financial quarters. Interest rates are a part of the financing equation that any investor building a commercial real estate portfolio will need to carefully consider. Investors will have to weigh how to best finance their longer-term investments, while navigating a volatile economic landscape throughout 2022 into the new year.
Real estate has historically served as a hedge against inflation, as well as a portfolio diversification tool. Commercial real estate can build a wealth foundation as it offers potential for positive returns as property values tend to increase over time. The rental sector continues to perform well, as many prospective home buyers either sit on the side lines, or find themselves priced out of ownership. Auriel Streit, Business Development Principal of Streit Lending, notes the primary questions for investors to ask first are, “What are my primary goals for my investment portfolio and what is my long-term strategy?” Streit Lending offers one to two year, fixed rate construction loans throughout Southern California to help investors build or rehabilitate their properties.
There are certain aspects to property investment that are within an investor’s control, but the levers controlling our macro-economy is largely beyond reach. Purchase price may be negotiated down and the level of renovation may be value engineered, to an extent. DSCR financing, a popular 30-year fixed rate long-term rental loan program, have increased rates from an average low of 3.75 percent in 2021 to roughly 5 percent in 2022. Although short-term, an asset’s cash flow will likely be reduced due to these higher financing costs, investors are advised not to hesitate to lock in a rate to reach their overall goals in building an investment portfolio that will be managed though economic ebbs and flows well into the future.