June 2023 | Volume 2
KNOWLEDGE HUB: INSIGHTS AND INFORMATION
The Impacts of Rising Interest Rates in the Commercial Market
Interest rates play a crucial role in shaping the dynamics of the commercial real estate market. As the cost of borrowing money increases, the effects ripple throughout the industry. Higher interest rates make financing more expensive, affecting developers seeking construction loans and businesses looking for commercial mortgages. This can lead to a decrease in borrowing activity, resulting in a slowdown in commercial real estate transactions and development projects.
Rising interest rates can also influence property valuations in the commercial market. As borrowing costs increase, the affordability of commercial properties declines. Consequently, the demand for properties may decrease, and sellers may have to adjust their pricing expectations to attract potential buyers. This can potentially lead to a softening of property values or a slowdown in price appreciation. As Lonicera looks to purchase property for Fund V, the team is not seeing the price adjustments yet. As the team analyzes deals, this is a main driver for ruling out potential deals.
The impact of rising interest rates may not be uniform across all segments of the commercial market. Some property types, such as high-quality assets in prime locations, may be more resilient to interest rate hikes due to their strong demand and limited supply. On the other hand, properties with lower occupancy rates, higher leverage, or in less desirable locations may face greater challenges as the cost of borrowing rises. Understanding the specific dynamics of different property types can help investors navigate the changing market conditions effectively.
As interest rates rise, the commercial real estate market experiences a range of impacts, from increased borrowing costs to decreased property valuations. Staying informed about these effects can help industry participants make well-informed investment decisions and adapt strategies to navigate changing market conditions. Flexibility, careful risk assessment, and a thorough understanding of local market dynamics remain crucial in mitigating the potential challenges and capitalizing on opportunities in the commercial market.
COMMERCIAL LEASING OUTLOOK
Midsize and small commercial leases tend to be 3 to 5 year terms. Because of this, the majority of pre-COVID commercial leases have come to term or will come to term this year. Demand for commercial leases has increased since 2020, indicating that the commercial real estate market is recovering and has likely seen the worst of the affects of Covid.
During due diligence of a new property, Lonicera reviews each lease to find when it was signed. If the majority of leases were signed pre-COVID, the team knows that this property has higher risk than one with variation of start dates. Throughout our research, we continue to see higher demand for smaller suite sizes and continue to tailor our property searches to fit these assumptions.
WHAT THE TEAM IS READING
Article by Alyssa Mercer
"Rich Dad Poor Dad" is a personal finance book written by Robert Kiyosaki. The book presents the contrasting stories of two father figures in the author's life: his own highly educated, but financially struggling, biological father (poor dad) and his friend's entrepreneurial, wealthy father (rich dad). Through their divergent perspectives, Kiyosaki shares valuable lessons on financial literacy and wealth creation.
The book emphasizes the importance of financial education and challenges the traditional mindset of working hard for money, advocating for acquiring assets that generate passive income.
Kiyosaki explains the difference between assets and liabilities, urging readers to prioritize investing in income-generating assets rather than accumulating liabilities that consume their earnings. Kiyosaki emphasizes the significance of developing a mindset focused on financial
independence and building wealth through business ownership, real estate investments, and other ventures. He stresses the value of taking calculated risks and learning from failures as essential components of achieving financial success.
"Rich Dad Poor Dad" has gained popularity for its straightforward writing style and impactful lessons. It has inspired many readers to reassess their approach to money, challenging conventional beliefs and encouraging them to strive for financial freedom and a more prosperous future.
FUTURE OUTLOOK
Since Lonicera Fund IV closed mid April, the team has been actively looking towards Fund V. Although we are currently in Columbus and Indianapolis, we continue to analyze deals throughout the Midwest to ensure we are pursuing the best opportunities for our investors.
If you have any questions about Lonicera Investments, our past performance, or our future, please reach out. We would be happy to sit down with you and answer any questions you have!
ANY ESTIMATES OR PROJECTIONS AS TO EVENTS THAT MAY OCCUR IN THE FUTURE, INCLUDING PROJECTIONS OF REVENUE, EXPENSE AND NET INCOME CONTAINED IN THIS VALUATION SUMMARY OR ANY OTHER OFFERING DOCUMENTS, ARE BASED UPON THE BEST JUDGMENT OF THE COMPANY’S MANAGEMENT AS OF THE DATE OF THIS VALUATION SUMMARY OR THE APPLICABLE OTHER OFFERING DOCUMENT. WHETHER OR NOT SUCH ESTIMATES OR PROJECTIONS MAY BE ACHIEVED WILL DEPEND UPON THE COMPANY ACHIEVING ITS OVERALL BUSINESS OBJECTIVES AND THE AVAILABILITY OF FUNDS. THE ESTIMATES AND PROJECTIONS NECESSARILY MAKE NUMEROUS ASSUMPTIONS WITH RESPECT TO INDUSTRY PERFORMANCE, GENERAL BUSINESS AND ECONOMIC CONDITIONS, TAXES AND OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY’S CONTROL. THERE IS NO GUARANTEE THAT ANY OF THESE PROJECTIONS WILL BE ATTAINED. ACTUAL RESULTS MAY VARY FROM THE PROJECTIONS, AND SUCH VARIATIONS MAY BE MATERIAL. THE COMPANY HAS NO OBLIGATION TO UPDATE OR OTHERWISE REVISE THE ESTIMATES OR PROJECTIONS TO REFLECT CIRCUMSTANCES EXISTING OR DEVELOPMENTS OCCURRING AFTER THE PREPARATION OF THE ESTIMATES OR PROJECTIONS OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.