Posted on July 25, 2025
How Interest Rates Affect Commercial Real Estate
In today’s fast-moving market, interest rates continue to influence nearly every decision in commercial real estate. Whether your client is refinancing a stabilized asset or pursuing acquisition financing, understanding how rates affect valuations, deal terms, and market behavior is critical.
At Lowery Property Advisors, we work alongside banks and other financial institutions to provide timely, accurate commercial real estate appraisal services, delivered with the clarity and precision expected. Our goal is to help you make informed, strategic decisions that align with market realities.
The Connection Between Interest Rates and Real Estate Lending
Interest rates, especially those set or influenced by the Federal Reserve, directly impact borrowing costs. These rates affect purchasing power and shape market demand for various commercial assets.
Key implications:
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Higher rates lead to increased monthly debt service, shrinking buyer pools.
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Lower rates expand affordability and stimulate transaction volume.
When interest rates shift, lenders and their clients must reassess deal structure, loan-to-value ratios, and expected returns. Understanding these dynamics supports sound underwriting and long-term performance.
How Interest Rates Impact Commercial Real Estate Appraisal
Interest rates influence commercial real estate appraisal outcomes indirectly through their effect on cap rates, transaction activity, and investor sentiment.
In high-rate environments:
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Cap rates tend to rise, which can lead to lower property values.
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Reduced transaction volume may limit comparable sales data.
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Investors often expect higher returns, putting downward pressure on pricing.
In low-rate environments:
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Cap rates compress as demand increases.
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Appraised values may trend upward due to competitive bidding and reduced yield thresholds.
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A larger pool of comparables can improve confidence in valuation conclusions.
For banks and lenders, understanding how current rate conditions affect appraisals is vital for risk assessment and loan strategy.
Property Types Respond Differently to Rate Shifts
Not all commercial asset classes respond the same way to rate changes. Market sensitivity often depends on lease structure, tenant credit, and asset liquidity.
General trends include:
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Multifamily: Often resilient due to demand, but sensitive to affordability metrics.
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Office: Highly dependent on tenant demand and macroeconomic recovery trends.
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Industrial: Strong fundamentals may cushion valuation dips even as rates rise.
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Retail: Varies by location and tenant mix, with increased pressure in tertiary markets.
A nuanced understanding of these trends can help set expectations and better interpret appraisal results within context.
Timing, Transactions, and Market Confidence
Periods of rising interest rates often introduce a gap between buyer and seller expectations. This can slow deal flow, reduce transactional data, and add complexity to underwriting.
Lenders should be aware of:
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Lagging market data in times of volatility.
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Greater emphasis on income approach when sales comps are sparse.
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The importance of experienced appraisal teams who can analyze market behavior, not just report it
With reduced deal volume, the accuracy and interpretation of appraisals become even more critical to the loan process.
Partnering with the Right Appraisal Firm Matters
For lenders and financial institutions, access to clear, defensible valuations helps clients make decisions confidently—even in uncertain rate environments.
Lowery Property Advisors provides:
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On-time delivery to meet tight closing schedules.
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Tech-enabled efficiency for seamless communication and faster insights.
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Dedicated research teams who track real-time market movement.
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A depth of experience across property types, regions, and rate cycles.
Our commitment to quality, clarity, and service allows our clients to support theirs with reliable information—every time.
Conclusion: Stay Informed, Stay Ahead
As interest rates continue to shift, staying informed is essential for both lenders and the clients they serve. Understanding how rates impact valuation, loan structure, and market behavior allows for better decisions and stronger outcomes.
Lowery Property Advisors is proud to support professionals with accurate, market-aware commercial real estate appraisal services. When clarity matters, when timing counts, and when the market moves—we’re ready to guide you forward.
