As the market fluctuates and interest rates rise, businesses and investors must respond accordingly. Rising rates cause turmoil in every sector, but with an intelligent understanding of the market and calculated decision-making, inaction or overreaction is avoidable. While both residential and commercial real estate have been impacted by rising interest rates, as an investment class, real estate can still offer high yields, substantial tax incentives, and predictability.
Despite the current rate environment, there are still excellent opportunities to invest in real estate projects that offer high yields. Investors can make strategic improvements to a property, thereby creating value and offsetting higher interest rates.
There are still many investment opportunities that present reliable cash flow, like multifamily properties that provide a steady flow of rental income/increases over time. Investors can also look to the future in the “adaptive reuse” space, converting one type of commercial property into another, such as turning office or hospital buildings into multifamily space. This solution addresses both post-pandemic vacant commercial space and the growing need for more housing.
Another avenue that can provide significant advantages for investors as interest rates continue to rise is opportunity zones. The Qualified Opportunity Zone (QOZ) program incentivizes developers to invest in economically distressed areas by providing tax incentives in return. The program benefits both investors and communities, especially in high-interest-rate environments. Per the Tax Policy Center, the tax benefits of QOZs include temporarily deferring taxes on previously earned capital gains and even the permanent exclusion of any taxes on capital gains if an investment is held for at least 10 years.*
Historical data has shown that, in response to rising interest rates, the housing market slows down, leading to a reduction in demand and a corresponding decrease in home prices. High interest rates generally reduce competition among buyers, which in turn reduces prices, opening a window for value-added investment opportunities.
However, historical data also reveals that overall real estate values have appreciated over time. It should be noted that an individual’s investment horizon varies and is unique to their liquidity goals; you can evaluate your financial situation and create an investment plan accordingly, determining whether to prioritize growth potential or liquidity, deciding the risks you can take, and then choosing a complementary strategy.
At Forbix, we believe that it is always a good time to buy the right asset. There are multiple factors to consider in making that evaluation, but if the numbers look right, we move forward. We’ve adapted to the environment of high interest rates and have the experience and flexibility to embrace sudden market shifts that would ordinarily unbalance conventional lenders/investors. Working with qualified partners, we recently acquired an office building located in a prime Southern California oceanfront community and QOZ that will be converted into 250 residential units, featuring 16,000 sq. ft. of storage space, 30,000 sq. ft. of commercial space, a rooftop terrace, and other amenities. Despite the climate of high interest rates, this adaptive reuse project makes sense to us as a strategic multifamily investment opportunity.
As a direct lender and expert in commercial and residential loans, we continue to thrive during what is mislabeled as a bleak environment for real estate and respective investors. We firmly believe that real estate endures as a great investment, evidenced through long-term value.
* The information provided is not intended to be tax advice. Consult a CPA or other tax professional before making any tax-related assessments or decisions.
Max Kolomeyer spent over two decades working in investment management and private banking. He recently served as Vice President and Senior Private Banker for City National Bank and prior to that for Comerica and Wells Fargo.
